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Open Homework Posted by: felana45 Posted on: 18/10/2020 Deadline: 2 Day

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In our brief case study, we assume the Thomas and Jefferson families have identical mortgages (30-year term, fixed-rate 6% APR, and a loan amount of $175,000). The Thomas family will not pay extra but the Jeffersons will. Follow the steps below prior to your analysis.

  1. Using the Payment mini calculator of the Financial Toolboxes spreadsheet, calculate the mortgage payment (the same for both families). Do this on both the Thomas Financial ToolBoxes Sheet and the Jefferson Financial ToolBoxes sheet in cell C18. Do NOT type in cell C18. Fill in Cells C13 – C17 with the correct information. (15 points)
  2. Assume that the Thomas’s will make only the required mortgage payment. The Jeffersons, however, would like to pay off their loan early. They decide to make the equivalent of an extra payment each year by adding an extra 1/12 of the payment to the required amount. On the Jefferson Financial ToolBox sheet, in cell L5 find the amount that the Jeffersons will be paying extra (1/12*payment). In cell L6 find their new monthly payment with this extra amount. (10 points)
  3. The Thomas’s will take the full 30 years to pay off their loan, since they are making only the required payments. The Jefferson’s extra payment amount, on the other hand, will allow them to pay off their loan more rapidly. Use the Years mini financial calculator of the Jefferson Financial Toolbox spreadsheet to calculate the approximate number of years (nearest 10th) it would take the Jeffersons to pay off their loan in cell C18. Do NOT type in cell F10. Fill in Cells F5- F9 with the correct information. (15 points)
  4. For the Thomas Family: assume that they could afford to make the same extra payment as the Jeffersons, but instead they decide to put that money (#2 from above) into a  savings plan called an annuity.  Use the  Future  Value  mini  financial  calculator  of  the Thomas Financial Toolbox spreadsheet to calculate how much they will have in their savings plan at the end of 30 years at the various interest rates on the Analysis sheet. Your answers should be on the Analysis sheet. (15 points)
  5. For the Jefferson Family: assume that they save nothing until their loan is paid off, but then after their debt is paid, they start putting their full monthly payment and 1/12 (#2 from above) into a savings plan. The time in months they invest is equal to 360 months minus the number of years needed to pay off the loan (#3 from above) multiplied by 12. Use the Future Value mini financial calculator of the Jefferson Financial ToolBox sheet to calculate how much they will have in their savings plan at the various interest rates on the Analysis sheet. Your answers should be on the Analysis sheet. (15 points)

Questions (30 points):

You will answer these questions in the Textboxes on the Questions sheet in the Excel File. Scroll DOWN to see all of the textboxes.

  1. What generalizations can you make from the annuity amounts reflected in the analysis table above with regards to the different strategies taken by the families? That is, from a purely financial aspect of the calculations in your table what generalizations could you make regarding the two different strategies? (6 points)
  2. What assumptions may not necessarily be valid for a typical family regarding both the loan rate and savings plan rate? (6 points)
  3. Discuss some basic pros and cons to these two very different approaches the Thomas and Jefferson families made with their extra monthly payment. Consider various ideas such as possible changes in the family’s employment situation, market performance, tax deductions, etc. (6 points)
  4. Now that you have completed your analysis, comment on the merits of the advice you read from the two financial columnists. Note the dates of the advice columns. How might market performance figure into their advice they gave at that time? Why do you think Sharon Epperson’s advice at the end specifically calls attention to an assumption of whether you are “debt-free and maxing out your 401(k) and IRAs?” (6 points)
  5. If you were to pay extra principal on a mortgage, when is the best time to do it (early or later in the loan process) and why? (6 points)

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Attachment 1


Thomas Financial ToolBoxes

Mini Financial Calculators
(Shaded boxes are the outputs based on the given inputs above the box. Do not type in the shaded boxes.)
APR APR APR
Compounds Compounds Compounds
Present Value Present Value Payment
Payment Payment Present Value
Years Future Value Years
Future Value: $0.00 Years: 0.0 Investment Interest: $0.00
APR APR Compounds
Compounds Compounds Payment
Present Value Future Value Present Value
Future Value Payment Years
Years Years Debt Interest: $0.00
Payment: $0.00 Present Value: $0.00
APR APY
Compounds Compounds
Effective Yield: 0.00% Nominal Yield: 0.00%
The formulas in the gray boxes are not cell-protected. Should you accidentally lose their information, refer to the items below.
You can copy and paste any of the formulas back into the gray boxes. Don't forget to drop the quote mark in front of the = sign.
Future Value: =FV(C5/C6,C6*C9,C8,C7)
Years: =(NPER(F5/F6,F8,F7,F9))/12
Debt Interest: =I6*I5*I8+I7
Payment: =PMT(C13/C14,C17*C14,C15,C16)
Present Value: =PV(F13/F14,F17*F14,F16,F15)
Investment Interest: =FV(I13/I14,I17*I14,I15,I16)+I15*I14*I17+I16
Effective Yield: =F22*((1+F21)^(1/F22)-1)
Nominal Yield: =F22*((1+F21)^(1/F22)-1)

Jefferson Financial ToolBoxes

Mini Financial Calculators
(Shaded boxes are the outputs based on the given inputs above the box. Do not type in the shaded boxes.)
APR APR APR Extra payment:
Compounds Compounds Compounds New Monthly Payment:
Present Value Present Value Payment
Payment Payment Present Value
Years Future Value Years
Future Value: $0.00 Years: 0.0 Investment Interest: $0.00
APR APR Compounds
Compounds Compounds Payment
Present Value Future Value Present Value
Future Value Payment Years
Years Years Debt Interest: $0.00
Payment: $0.00 Present Value: $0.00
APR APY
Compounds Compounds
Effective Yield: 0.00% Nominal Yield: 0.00%
The formulas in the gray boxes are not cell-protected. Should you accidentally lose their information, refer to the items below.
You can copy and paste any of the formulas back into the gray boxes. Don't forget to drop the quote mark in front of the = sign.
Future Value: =FV(C5/C6,C6*C9,C8,C7)
Years: =(NPER(F5/F6,F8,F7,F9))/12
Debt Interest: =I6*I5*I8+I7
Payment: =PMT(C13/C14,C17*C14,C15,C16)
Present Value: =PV(F13/F14,F17*F14,F16,F15)
Investment Interest: =FV(I13/I14,I17*I14,I15,I16)+I15*I14*I17+I16
Effective Yield: =F22*((1+F21)^(1/F22)-1)
Nominal Yield: =F22*((1+F21)^(1/F22)-1)

Analysis

Thomas Family Jefferson Family
Rates 1/12th of monthly payment annuity amount in 360 months Rates 1/12th of monthly payment + monthly payment annuity amount AFTER mortgage is paid
0% 0%
1% 1%
2% 2%
3% 3%
4% 4%
5% 5%
6% 6%
7% 7%
8% 8%

Questions

SCROLL DOWN TO SEE ALL QUESTIONS
Question 1: What generalizations can you make from the annuity amounts reflected in the analysis table above with regards to the different strategies taken by the families? That is, from a purely financial aspect of the calculations in your table what generalizations could you make regarding the two different strategies?
Question 2: What assumptions may not necessarily be valid for a typical family regarding both the loan rate and savings plan rate?
Question 3: Discuss some basic pros and cons to these two very different approaches the Thomas and Jefferson families made with their extra monthly payment. Consider various ideas such as possible changes in the family’s employment situation, market performance, tax deductions, etc.
Question 4: Now that you have completed your analysis, comment on the merits of the advice you read from the two financial columnists. Note the dates of the advice columns. How might market performance figure in to their advice they gave at that time? Why do you think Sharon Epperson’s advice at the end specifically calls attention to an assumption of whether you are “debt-free and maxing out your 401(k) and IRAs?”
Question 5: If you were to pay extra principal on a mortgage, when is the best time to do it (early or later in the loan process) and why?

Why the Negative

Rules of Thumb:
1. Notice that present value and future value are typically opposite in sign.
2. Use the "Inflow-Outflow" way of thinking: Inflow is money coming in and outflow is money "out-the-door".
3. If all else fails, try changing the sign of any of the inputs to see how it affects the result and act accordingly.
4. Don't get "burned" by the negative or lack of a negative in the financial formulas. Always consider its role.