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Alan Cring Productions in association with Emergent Light Studio presents

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the Illinois State Collegiate Compendium, academic lectures in business and economics.

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This is Business Finance, FIL 190 for spring semester 2024.

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Today, present values and future values.

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You will have a quiz, a ten minute quiz, and I will let you start on that at 10.35 this morning.

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But other than that, we are just going to have a happy time here today.

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First of all, looking at this.

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We have a bear market and a bull market.

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This one is a kangaroo market, down massively and then up substantially today.

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It's not a spectacular day yet, but it's a strong sustained upward momentum in the market right now.

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So without further ado here.

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As you can see, it is a bull day, definitely a bull day.

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You've got everything green.

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And so there is a decisive trend.

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And if you'll notice, see these spark charts?

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Well this one, the Dow, I don't know what happened there.

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But there's a generally consistent pull upward.

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There may be some corrections along the way, profit taking and all that.

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But at the same time, it seems to be showing signs of life.

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Yesterday was one of those days that was just pure suckitude across the board.

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And dragged down one of my high beta investments into the earth.

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And now it's pretending like it doesn't notice that the market is going up.

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So that just irritates the hell out of me.

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But anyway, let's go back over here and have a look.

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Now as is typical, the Dow is up the least, the lowest risk portfolio.

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And then you've got the next at.22%.

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And then the S&P 500, this early in the morning it's up.60%.

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And we've got the NASDAQ up.81%.

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The classic risk return.

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The classic risk return relationship that you usually see, we see here today.

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Where we want to go over very quickly and have a look at the bond market.

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And as you can see, that there the yields are falling.

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Which means the prices are rising.

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Which means investors are pouring money into the bonds as well.

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So we've got a broad based rally of both equities and debts.

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Bonds, both of them heading on the upside, heading upward right now.

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So that would show a lot of confidence.

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And matter of fact, all those three basis points down on the bond yield.

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Coming over here, where the heck am I?

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Oh, just a quick note here.

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Notice gold is down.

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So in other words, the highly defensive commodity is pulling back.

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So investors are saying, let's get into the risk and out of the safe harbor.

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That's all good news.

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In other words, you're getting multiple signals of a strong bear market.

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Even if it's not up spectacularly yet, this is a good sign for you out there who are bulls.

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Now again, I emphasize for investment people, for finance people, everyone thinks,

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well we make money in bull markets, we lose money in bear markets.

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That's not true.

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You can make as much money in a bear market with equities dropping.

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As you can in a bull market.

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I'll show you how.

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It's that side of the market where people don't think there's a way to make money on the downside.

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Well there are plenty of ways.

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Well short selling is one.

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Put options is another.

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There are plenty of ways that you can make money in a bear market.

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We just kind of tend to like to see bull markets because that generally indicates

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that the overall economy is doing well too in a bull market.

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But that's certainly not the case that you can't make money in a bear market.

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You have to be flexible in your thinking.

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Crude oil, it's beginning to push a little bit scary toward that upper level of the 72 to 79 trading range

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that it seems to have favored for several years now.

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Right now it's up there bumping on the top end of it.

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And a lot of that is just the general condition of the oil markets.

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Everything from production levels at the well heads to how much is getting into the tankers and is on the high seas.

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How easily they can get their tankers into the different ports that they would want to get into and all that.

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And then how about the refineries?

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Are they able to take that oil in and turn it into hydrocarbon products for different consumer groups?

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It's all complicated.

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It is a world of its own.

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And it's actually, every time I've gotten into that world, I feel like I'm walking across the entire earth.

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Because in one minute we're talking about reserves in the Middle East, in some country,

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in another minute we're talking about whether or not VLCs can get into the ports that they use,

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as opposed to the ports that are not big enough to handle the super tankers, all that kind of stuff.

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So it's a fun world and it's not a world that I talk too much about in a class like this, unfortunately.

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But moving on here, coming over here just for a quick look at the overseas markets.

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The Nikkei was just in a pissy mood.

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More or less it started out immediately down and then it just kind of floated going a little lower and then kind of rallying.

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And then at the end, the rally, as you can see right there at the end of that spark chart,

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this bull attempt to come back up above water was thwarted right there at the end by a little bit of a sell-off.

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So there wasn't anything happy going on over in Tokyo,

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so we'll let the sun set there and come over to our friends on the big island on the other side of the Atlantic.

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And they had a pretty decent day there.

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By the end though, you see that same profit-taking began to take hold there in London.

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They're not finished yet for the day.

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And that profit-taking just sort of came and then no more news came in and showed up.

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So it's kind of floating right there toward the end.

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On our side of the world, as you can see, we started up at the bell.

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At the bell, we were already in positive territory.

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And from there, it leveled for a little while.

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As a matter of fact, the Dow dipped a little bit, but then a surge came again.

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Some more good news, and I'm not sure what's going on this morning.

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I haven't had a chance to talk to anyone or look at any of the back message boards,

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but something is making everyone happy today.

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Well, there's no news here.

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Okay, a new stock price target for Nvidia ahead of earnings.

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NVDA, risky AF, but we'll have a quick look at it to see.

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Whoa, look at that, up 2%.

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Now there's a stock that you might want to grab a couple of hundred shares of right now.

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$736 in change per share on that.

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So it's definitely not an average investor's pick up a round lot.

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A round lot's a hundred again.

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I don't think any of us could afford to grab a round lot of Nvidia.

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But of course, you're taking that chance.

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Look at that.

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First of all, the beta is well above 1.

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This is in highly risky territory.

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This is for the serious risk takers.

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And then the PE ratio, that's saying it's overvalued.

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Well, whatever.

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And of course, you've got an EPS strongly positive, $7.58 per share.

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So there you go.

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Everything looks good on the way into the earnings.

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That dividend is about as lousy as you can get for a dividend,

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which tends to indicate from looking at those very financial ratios

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as you have that they're plowing a lot of money back into the company.

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Very little bit of a dividend.

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But if you look here at the earnings, their earnings are coming out in just a week.

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And so this is rumor.

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Buy on the rumor.

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See how it's going up in advance of the earnings?

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What we're seeing here is that Nvidia is going to say,

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we will post $4.50 per share earnings.

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But the market's already corrected, done that, because they posted that weeks ago,

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what they think it is.

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So what is going on right now is that the market's, the rumor is that they will come in above.

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With the actual earnings for the quarter, they'll come in above $4.50.

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That's what's exciting the markets right now.

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So that's why it's pushing up, reflecting the rumor.

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Now remember what I told you, it's not always true,

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but the old saying is you buy on the rumor, sell on the news.

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So if we get really close to the day of the earnings,

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you'll see a sell-off of the old timers,

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because we always know that it's going to spike.

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If there's rumors that it's going to be better than what the company says they think it's going to be,

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the rumors are going to push that price up.

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And then when it comes in, whether it comes in above or below or at the earnings,

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there's no more price momentum upward at that point in time.

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Any momentum is going to be on the downside.

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It's either going to do what the rumor said, and so there's not going to be a price spike.

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It's going to come in at what the earnings were,

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which is going to defeat the rumors and there will be a small sell-off,

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or it's going to come in under the estimate and then there will be a serious sell-off.

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So there's really not a whole lot of good news, good good,

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in holding on through the earnings call in one week from today.

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Just some of the old time advice and the learning you get from doing this

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in the actual trading rooms and all that over the years.

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Anyway, let me show you something here.

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Get off this.

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As I said, Excel is going to be our go-to for all kinds of happy things that we do in this class.

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And as I said a long time ago, we would have done things with actual pencil and paper,

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calculating formulas for present values, future values, and all that kind of stuff.

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Then came the era of the financial calculators,

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and there was a lot of resistance to those even to a few years ago.

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There were some professors here who said, I don't allow financial calculators to be used.

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If they want to use something, they'll use tables.

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Tables were the thing from the 1960s onward,

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and they're still used in a lot of academic courses,

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especially those that are taught by older professors

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or where those older professors are in charge of telling the new professors what to do.

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So the tables are still out there.

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You've got to use tables. You can't use calculators.

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Well, come on. That's just ridiculous because those tables were generated from calculations done on computers or calculators.

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Then came the era of Excel after the financial calculators.

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It wasn't taught hardly at all except in a few elite colleges until the last few years.

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Here, I use Excel to do the problems.

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Now, don't get me wrong. Sometimes a good financial calculator like the TI-83 Plus or TI-84,

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it can do things actually kind of more efficiently than Excel can.

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The problem with using a calculator is you don't have a documented sheet

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that you can print out or email to someone else or put up on a screen.

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And that's the weakness. Even when the TI-83 or the TI-84 would be a faster way to do problems,

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it's still, for our purposes, you folks are going to be in environments where you have to show this to someone.

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That's why Excel, we do it.

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And sometimes Excel is a little more cumbersome and you have to memorize a lot of things.

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It doesn't take a lot, though. Don't get me wrong.

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To do basic what I'm going to do in this chapter, you don't need to be a super hot Excel certified by Wall Street Prep

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or something like that. You don't have to, for what I do in here.

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You just got to know a few formulas and that's all there is to it.

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And so we'll do that. But I do want to show you a couple of things here really quickly.

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First things first. Let me go back up here to files and see if I actually had the sense

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Here, this, okay, the background.

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The slide rule calculators, as it were, started showing up in the mid-1970s.

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And then from there, in the early 80s, some financial calculators, hardcore financial calculators started showing up.

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HP, Hewlett-Packard had an HP12C, which was a beast at doing a lot of finance things.

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And it was embraced, even though it didn't use algebraic logic, it used RPN, reverse Polish notation.

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You got the hang of it because my God, that thing could do financial calculations like lightning.

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TI came along with a couple of basic financial calculators.

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The BA series, the BA and the BA2, and a few others.

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And those can do a lot of financial calculations.

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They're a little cumbersome to work with.

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And I think the book even shows you, well, you can do this with a TI BA2, and they show you the steps.

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And you can see that's kind of dodgy.

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Then they came out with the TI8X series, 80, 82, 83, 83 plus and all that.

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And they had a hidden secret. They had finance apps in them.

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And I'm going to show you those in just a minute here so that you can see them.

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And they passed this around as a downloadable in the 90s for geeks to see how it worked.

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And it shows up as a TI83 plus on your computer.

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And then it acts just like a physical TI83.

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And they passed it around. It was a ginormous zip file containing an XE file and all that.

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And that was, I mean, every geek who got a hold of one of these.

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And then, interestingly enough, it disappeared.

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TI stopped handing it out because obviously you get that, then you didn't need to buy a $150 calculator.

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But there was still a TI site you could go to and find it, if you really were that kind of a person.

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And then it vanished from there.

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And then somehow it showed up as a Google restricted file.

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Well, I had my old floppy disks and I had it.

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And now you can have it too.

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Now if you go out and blab to everyone and put this up on some full social media circus, I will find you.

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But you can do this. Now understand this is not for Macs.

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Macs are not financial computers. They just aren't.

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And so this was never brought out as a Mac application.

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So let me show you what here.

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See this virtual TI83 graphing calculator?

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You click on this and download.

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Now follow with me. If you want this, it's yours.

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Ow, I almost hurt something I care about doing there.

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Now open the file.

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Now as you can see, what's going to happen is this is a zip file.

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The first thing you're going to want to do is...

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Does this even have a zip?

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Do they have a zip cancel? Let me do this. Let me try it this way.

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This...

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Open with.

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It's a zip file. I know that.

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00:18:50,000 --> 00:18:54,000
Does this thing even have zip in it?

227
00:18:55,000 --> 00:18:59,000
Okay, let's get back up here to the root directory.

228
00:19:00,000 --> 00:19:03,000
Oh, it's not going to let me... This PC.

229
00:19:04,000 --> 00:19:06,000
Windows.

230
00:19:07,000 --> 00:19:10,000
Program files.

231
00:19:10,000 --> 00:19:18,000
Windows, I don't... They got rid of... I can't unzip a file here.

232
00:19:19,000 --> 00:19:22,000
Unreal.

233
00:19:23,000 --> 00:19:27,000
Let me go up one.

234
00:19:28,000 --> 00:19:30,000
See if it's in here somewhere.

235
00:19:31,000 --> 00:19:35,000
Oh, 7-zip thing. Yes, yes.

236
00:19:35,000 --> 00:19:39,000
Just once.

237
00:19:40,000 --> 00:19:44,000
Well, does that work?

238
00:19:51,000 --> 00:19:56,000
It keeps killing it. When I try to open it, it kills it.

239
00:19:57,000 --> 00:20:00,000
Oh, hells bells and pigeon poop.

240
00:20:00,000 --> 00:20:04,000
It's not letting me unzip it. You can do it on your own.

241
00:20:05,000 --> 00:20:08,000
Just unzip it and you'll get an.exe file. You execute it.

242
00:20:09,000 --> 00:20:13,000
And you go down a couple of directories and you'll see vit83.

243
00:20:14,000 --> 00:20:23,000
Just copy that to your desktop, that executable vi file, and you'll have the virtual calculator.

244
00:20:24,000 --> 00:20:26,000
I can't believe it's not going to... Let me try one more thing.

245
00:20:26,000 --> 00:20:29,000
Real quick, I don't want to waste too much time on this.

246
00:20:30,000 --> 00:20:36,000
But, let me go back up here to the PC and Windows.

247
00:20:37,000 --> 00:20:40,000
Program files.

248
00:20:41,000 --> 00:20:44,000
7-zip.

249
00:20:47,000 --> 00:20:51,000
There we go.

250
00:20:51,000 --> 00:20:56,000
7-zip.

251
00:20:57,000 --> 00:21:01,000
I need the executable.

252
00:21:02,000 --> 00:21:06,000
View. Details.

253
00:21:07,000 --> 00:21:10,000
Is this an executable?

254
00:21:11,000 --> 00:21:15,000
I can't tell.

255
00:21:16,000 --> 00:21:19,000
7-zip.

256
00:21:19,000 --> 00:21:22,000
Nope. They're not going to let me do it.

257
00:21:23,000 --> 00:21:27,000
They're so afraid of anyone doing something. Open.

258
00:21:28,000 --> 00:21:34,000
See, every time I try to open it, they've got some kind of a block on it.

259
00:21:35,000 --> 00:21:38,000
So you put a program on the computer that no one can use.

260
00:21:39,000 --> 00:21:43,000
And you can kiss my ass. I'll figure out how to do it and I'll show it to you next week if you can't do it yourself.

261
00:21:44,000 --> 00:21:47,000
But trust me, it's really handy to have that calculator.

262
00:21:47,000 --> 00:21:51,000
But anyway, let me go back here. Apologies for that nonsense.

263
00:21:52,000 --> 00:21:54,000
Files.

264
00:21:55,000 --> 00:21:58,000
Go down here to spreadsheets.

265
00:21:59,000 --> 00:22:09,000
Now, in the spreadsheets, you're going to see some spreadsheets that are quite useful to you in this class.

266
00:22:09,000 --> 00:22:18,000
You can calculate internal rates of return, present values, future values, internal rates of return, all of those.

267
00:22:19,000 --> 00:22:30,000
And we'll build those, but the templates are already in there for you to be able to use to calculate present values, future values, payments, and all of that kind of stuff.

268
00:22:31,000 --> 00:22:32,000
It's already there for you.

269
00:22:32,000 --> 00:22:41,000
And let me look real quick here. Free cash flow, IRR, NPV, and IRR.

270
00:22:42,000 --> 00:22:47,000
Loan payments, present values, there we go. No, quit that.

271
00:22:48,000 --> 00:22:50,000
Present values and future values.

272
00:22:51,000 --> 00:22:53,000
Download.

273
00:22:53,000 --> 00:23:05,000
And this will allow you to calculate present values. It'll allow you to calculate future values.

274
00:23:06,000 --> 00:23:14,000
Instead of using tables or formulas you calculate or a calculator, these will do the job for you.

275
00:23:15,000 --> 00:23:19,000
The whole thing about doing these in Excel is just knowing the calling function.

276
00:23:19,000 --> 00:23:26,000
What calling function is used to get a present value? What calling function is used to get a future value?

277
00:23:27,000 --> 00:23:32,000
How about payments on a loan? These are all in the time value of money.

278
00:23:33,000 --> 00:23:39,000
So we'll talk about this over the next few minutes and a little bit next week.

279
00:23:39,000 --> 00:23:54,000
But you sir come to me and you say I should like to have $20. For how long? For a year. Okay.

280
00:23:55,000 --> 00:24:01,000
So I say, well now in a year you say, well I'll give you your $20 back in a year.

281
00:24:02,000 --> 00:24:07,000
And I say kiss my wrinkled old ass. Why am I going to say that to you?

282
00:24:07,000 --> 00:24:14,000
Because you just, there's no reason, no incentive for you to do that.

283
00:24:15,000 --> 00:24:17,000
Well sure there is. You're going to beat the crap out of me if I don't do it.

284
00:24:18,000 --> 00:24:23,000
But the whole thing there is that you see there is a time value of money.

285
00:24:24,000 --> 00:24:35,000
And at the heart of every interest rate out there is this underlying truth that I give you $20.

286
00:24:35,000 --> 00:24:39,000
I don't have it for a certain period of time.

287
00:24:40,000 --> 00:24:44,000
Underneath all of the other things like well inflation or risk or all that,

288
00:24:45,000 --> 00:24:50,000
there's this reality that I have given up consumption from this for a year.

289
00:24:51,000 --> 00:25:00,000
So at the heart of the entire concept of the time value of money is the opportunity cost of foregone consumption.

290
00:25:00,000 --> 00:25:10,000
So when you look at financial statements, there's really not a, you can't just say, well last year, well,

291
00:25:11,000 --> 00:25:25,000
sales last year were $21,000 and sales this year were $22,000.

292
00:25:25,000 --> 00:25:30,000
Also, we've done better this year.

293
00:25:31,000 --> 00:25:38,000
Well not really because I'm not comparing those numbers, they have dollar signs.

294
00:25:39,000 --> 00:25:43,000
But you see that is a hidden convenience that hides something very important.

295
00:25:43,000 --> 00:25:55,000
Very important because dollars or any currency or any value at all is time dependent.

296
00:25:56,000 --> 00:26:02,000
We never put in dollars in 2023.

297
00:26:03,000 --> 00:26:05,000
We don't put dollars in 2022.

298
00:26:06,000 --> 00:26:08,000
We leave out that last part of the units.

299
00:26:08,000 --> 00:26:15,000
The units are not dollars, the units are those dollars at the time that they occurred.

300
00:26:16,000 --> 00:26:27,000
And so I can't just look at $22,000 and compare it to $21,000 because the units of measure are actually different.

301
00:26:28,000 --> 00:26:31,000
The difference is hidden, we would never write it directly on there,

302
00:26:31,000 --> 00:26:37,000
but for us in finance, we have to appreciate that that is what's going on.

303
00:26:38,000 --> 00:26:48,000
Over time, if I were to telescope this back to here,

304
00:26:49,000 --> 00:26:55,000
that $22,000 would look a lot more like $21,000.

305
00:26:55,000 --> 00:27:02,000
Or if I were to take that $21,000 and bring it forward a year as a future value,

306
00:27:03,000 --> 00:27:08,000
that $21,000 would look a lot more like that $22,000.

307
00:27:09,000 --> 00:27:10,000
That's the time value of money.

308
00:27:11,000 --> 00:27:17,000
Almost no one thinks in these terms, but it is the reality we have to appreciate.

309
00:27:18,000 --> 00:27:19,000
Dollars are time dependent.

310
00:27:19,000 --> 00:27:25,000
And so we have to use a conversion factor.

311
00:27:26,000 --> 00:27:35,000
Like for example, one inch equals 2.54 centimeters.

312
00:27:40,000 --> 00:27:43,000
We convert like that, that's a conversion factor.

313
00:27:44,000 --> 00:27:46,000
Well, we have to have conversion factors in our business.

314
00:27:46,000 --> 00:27:50,000
Now somewhere along the line, you learn unit conversions.

315
00:27:51,000 --> 00:27:52,000
And they're static.

316
00:27:53,000 --> 00:27:54,000
That is always the case.

317
00:27:55,000 --> 00:27:58,000
One inch equals 2.54 centimeters, and a lot of other ones.

318
00:27:59,000 --> 00:28:00,000
Three feet equals one yard.

319
00:28:01,000 --> 00:28:03,000
They are what we call static conversion factors.

320
00:28:04,000 --> 00:28:05,000
They are always the same.

321
00:28:06,000 --> 00:28:12,000
In finance though, the problem is that they aren't always the same.

322
00:28:12,000 --> 00:28:15,000
There is a variable factor.

323
00:28:16,000 --> 00:28:17,000
Well, there are two variable factors.

324
00:28:18,000 --> 00:28:21,000
There is the discount rate, and there is the time.

325
00:28:22,000 --> 00:28:31,000
So the conversion factor would be different depending upon the discount rate and the time period.

326
00:28:32,000 --> 00:28:35,000
That's what those tables that you used in accounting were.

327
00:28:35,000 --> 00:28:43,000
They were the conversion factors based upon different interest rates and different times, whichever way they did.

328
00:28:44,000 --> 00:28:55,000
So they were actually dimensional tables, but we in finance would like to kind of avoid using tables and look at the formulas themselves and use those formulas.

329
00:28:56,000 --> 00:29:03,000
Either on paper or with a financial calculator or with Excel to get those dynamically as we need them.

330
00:29:03,000 --> 00:29:12,000
And that in Excel especially is kind of nice because you can alter the parameters that drove the conversion factor.

331
00:29:13,000 --> 00:29:16,000
Okay, instead of using a 2% interest rate, let's use a 5% interest rate.

332
00:29:17,000 --> 00:29:21,000
And the conversion factor would instantly change and all of your results would change.

333
00:29:21,000 --> 00:29:29,000
So, probably for the next, I don't know, 25, 35, 40 years, we'll show you a few of the formulas.

334
00:29:30,000 --> 00:29:34,000
And I'm beginning to wean my classes off the formulas.

335
00:29:35,000 --> 00:29:38,000
I show, there's kind of like a foundation, core formula.

336
00:29:39,000 --> 00:29:42,000
And I would like to show you a few of the formulas.

337
00:29:42,000 --> 00:29:50,000
And I'm beginning to wean my classes off the formulas. I show, there's kind of like a foundation, core formula.

338
00:29:51,000 --> 00:29:56,000
And I will show you that and I will be showing you that until the Lord calls me home just to send me down to hell.

339
00:29:57,000 --> 00:29:59,000
But, so I'll show you the core formula.

340
00:30:00,000 --> 00:30:05,000
But past that one, I'm not going to really push it too much.

341
00:30:05,000 --> 00:30:13,000
The future value, and this is for a lump sum of money.

342
00:30:14,000 --> 00:30:30,000
The future, ow, God, the future value is the present value times 1 plus r to the t power.

343
00:30:30,000 --> 00:30:36,000
That's sort of like the core driving formula.

344
00:30:37,000 --> 00:30:38,000
This is for compounding.

345
00:30:39,000 --> 00:30:41,000
I don't even go through simple interest.

346
00:30:42,000 --> 00:30:49,000
And there's a problem with doing that because there are still a few places in finance that use simple interest calculations.

347
00:30:50,000 --> 00:30:58,000
Specifically, in money markets, it's used all the time, the simple version.

348
00:30:58,000 --> 00:31:01,000
I don't even show that anymore even though I probably should.

349
00:31:02,000 --> 00:31:03,000
But let me do a couple of things here.

350
00:31:04,000 --> 00:31:06,000
This is the future value.

351
00:31:08,000 --> 00:31:12,000
Future value.

352
00:31:13,000 --> 00:31:18,000
This is the present or current value.

353
00:31:19,000 --> 00:31:22,000
Present value.

354
00:31:23,000 --> 00:31:26,000
Now here is where the kicker comes in.

355
00:31:26,000 --> 00:31:32,000
R is the periodic rate.

356
00:31:33,000 --> 00:31:39,000
T is the number of periods.

357
00:31:44,000 --> 00:31:47,000
Now this is important to keep in mind to remember.

358
00:31:47,000 --> 00:32:00,000
Excel and a good financial calculator like the TI-83 Scientific, you still have to tell it how many periods per year.

359
00:32:01,000 --> 00:32:10,000
So for example, the annual interest rate, the APR, let's say that's 8%.

360
00:32:10,000 --> 00:32:33,000
And let's say that the, okay, let's say period the compoundings per year.

361
00:32:40,000 --> 00:32:56,000
Now if it's annual compounding, then that would be one period.

362
00:32:56,000 --> 00:33:10,000
So the R would be 8% divided by 1, which is 8%.

363
00:33:11,000 --> 00:33:21,000
If it is semi-annual, that would be two compoundings per year.

364
00:33:21,000 --> 00:33:33,000
So you would have the R in the formula would be 8% divided by 2 or 4%.

365
00:33:33,000 --> 00:33:54,000
If it is quarterly, that would be 4 per year, so it would be 8% divided by 4 or 2%.

366
00:33:54,000 --> 00:34:11,000
The next one that is important, and this one is very important in consumer loans and consumer debt, is the monthly.

367
00:34:11,000 --> 00:34:28,000
And that one, it's 12, so it would be 8% divided by 12.

368
00:34:29,000 --> 00:34:33,000
What is that, 0.67%?

369
00:34:34,000 --> 00:34:37,000
I am really, really lame.

370
00:34:37,000 --> 00:34:43,000
Give me a calculator, for God's sake.

371
00:34:47,000 --> 00:34:50,000
Scientific.

372
00:34:51,000 --> 00:34:54,000
Okay, 8 divided by 12.

373
00:34:55,000 --> 00:34:57,000
Try that again.

374
00:34:58,000 --> 00:35:02,000
8 divided by 12.

375
00:35:03,000 --> 00:35:05,000
Is there some reason this sucks?

376
00:35:05,000 --> 00:35:07,000
Oh, clear. Try it again.

377
00:35:08,000 --> 00:35:11,000
8 divided by 12.

378
00:35:12,000 --> 00:35:23,000
Now, the next one, if you had compoundings weekly, so what would weekly be?

379
00:35:24,000 --> 00:35:29,000
54? 52.

380
00:35:29,000 --> 00:35:39,000
I did that on purpose because I am appalled, mind you, appalled that folks these days don't remember how many weeks are in a year.

381
00:35:40,000 --> 00:35:55,000
Okay, if it's weekly compounding, then that would be 52, so you would have 8% divided by 52.

382
00:35:55,000 --> 00:36:00,000
And by the way, there is another one.

383
00:36:01,000 --> 00:36:03,000
There are two other ones.

384
00:36:04,000 --> 00:36:10,000
The prefix buy would mean that it happens every two weeks.

385
00:36:11,000 --> 00:36:15,000
So bi-weekly would be 26.

386
00:36:16,000 --> 00:36:18,000
Bi-monthly would be 6.

387
00:36:19,000 --> 00:36:23,000
And then there is the other one, which you see there, semi.

388
00:36:23,000 --> 00:36:27,000
Semi means twice every time.

389
00:36:28,000 --> 00:36:30,000
So semi-weekly would be twice a week.

390
00:36:31,000 --> 00:36:35,000
And then there are a couple of other ones from sesquicentennial.

391
00:36:36,000 --> 00:36:40,000
I won't even try that one. It's like every one and a half.

392
00:36:41,000 --> 00:36:43,000
I hope you'll never have to see a sesquicentennial.

393
00:36:44,000 --> 00:36:51,000
Although a lot of towns have their sesquicentennial, which is 150 years the town has been around.

394
00:36:51,000 --> 00:36:53,000
But I won't get into that.

395
00:36:54,000 --> 00:36:56,000
Now, there is another one, daily.

396
00:37:01,000 --> 00:37:04,000
Daily is an oddball.

397
00:37:05,000 --> 00:37:08,000
Now some of your textbooks say just use 365.

398
00:37:08,000 --> 00:37:20,000
However, in banking especially, you use 360 or you use 360 and 365.

399
00:37:21,000 --> 00:37:22,000
And you're saying, huh?

400
00:37:23,000 --> 00:37:30,000
But as a matter of fact, there is a teaching assistant in this class who went through that, seeing when we...

401
00:37:31,000 --> 00:37:36,000
Okay, money market yields, money market rates are calculated on a 360.

402
00:37:36,000 --> 00:37:44,000
But effective market rate, you then convert that to 365 days in a year.

403
00:37:45,000 --> 00:37:47,000
Now where did the 360 come from?

404
00:37:48,000 --> 00:37:56,000
Well, the traditional explanation is because there were traditionally five bankers days a year.

405
00:37:57,000 --> 00:37:58,000
Five bankers days a year.

406
00:37:59,000 --> 00:38:02,000
The actual reason, and I won't show you why, how.

407
00:38:02,000 --> 00:38:10,000
But there is an arithmetic trick for the number 360 as a divisor.

408
00:38:11,000 --> 00:38:20,000
And so it made it a lot easier in banking to calculate a daily interest rate.

409
00:38:20,000 --> 00:38:43,000
Okay, but now the T would be the number of years times annual one, semi-annual two, quarterly four, weekly 52,

410
00:38:43,000 --> 00:39:01,000
and for daily, if you use the 360 and 365 together, which is technically the way you're supposed to do it,

411
00:39:01,000 --> 00:39:12,000
you divide the annual interest rate by 360 and you use 365 in the exponent there.

412
00:39:12,000 --> 00:39:41,000
So, you put $1,000 into an account carrying an APR of 5.2%

413
00:39:42,000 --> 00:39:47,000
compounded quarterly.

414
00:39:47,000 --> 00:40:12,000
How much will be in the account after 15 years?

415
00:40:12,000 --> 00:40:41,000
15 years.

416
00:40:42,000 --> 00:41:02,000
So the formula is the future value is the present value times 1 plus R to the T power.

417
00:41:02,000 --> 00:41:26,000
So in this case, it would be, well, we have right now $1,000 and the interest rate is 0.052 over quarterly to the four times a year for 15 years.

418
00:41:26,000 --> 00:41:36,000
Now remember to trap things in parentheses for God's sake, because the order of operations, your calculator,

419
00:41:37,000 --> 00:41:45,000
if you're using a calculator, you are going to, it's going to believe that you want order of operations strictly.

420
00:41:45,000 --> 00:42:01,000
So what I'm going to do here, I'm going to drop this down and straight up, this one, it's ridiculous to use Excel to do it.

421
00:42:02,000 --> 00:42:08,000
It takes longer to enter all the data than it would be to just go ahead and do it yourself.

422
00:42:08,000 --> 00:42:30,000
So I'm going to take all this down, clear this out, and we're going to do 1,000 times, open parentheses, 1 plus 0.052 divided by 12.

423
00:42:30,000 --> 00:42:40,000
Now notice I don't need to use a parenthesis for that division, because the division by order, the hierarchy of operations will come before the addition anyway.

424
00:42:41,000 --> 00:42:53,000
But I do need now to close this off, and then I'm going to raise this, and this is where you have to put in parentheses,

425
00:42:53,000 --> 00:42:59,000
because the only way that it's going to, it's going to take exponents first.

426
00:43:00,000 --> 00:43:11,000
So if I just put in 4 times 15, it will do the exponent 4, and then times comes lower in the hierarchy, so then it would take the result times 15.

427
00:43:12,000 --> 00:43:15,000
So you have to trap that in parentheses, did I do that yet? Nope.

428
00:43:15,000 --> 00:43:25,000
So open parentheses, 4 times 15, close the parentheses, and now there's your Uncle Bob.

429
00:43:25,000 --> 00:43:49,000
$1,296.20.

430
00:43:49,000 --> 00:44:06,000
Now on a test or a quiz, I would not ask you to do anything more than round to the nearest dollar.

431
00:44:07,000 --> 00:44:16,000
And I'll give you a little fudge of a couple of dollars both ways, in case you had a little finger fart on the keyboard or something like that.

432
00:44:16,000 --> 00:44:21,000
So the answer would be $1,296.

433
00:44:22,000 --> 00:44:32,000
And then I'd tell your test generator, take any number, answer between $1,293 and $1,299 as being correct.

434
00:44:33,000 --> 00:44:37,000
Precision is very important.

435
00:44:37,000 --> 00:44:46,000
However, there's something, now here's a little secret about time value of money problems, whatever they are.

436
00:44:47,000 --> 00:44:55,000
If you make a mistake, almost guaranteed your number, your answer will look wrong.

437
00:44:56,000 --> 00:45:02,000
It will be either a few pennies or a few tens of thousands of dollars for a problem like this.

438
00:45:02,000 --> 00:45:09,000
If you forget to put the parentheses in that exponent, something like that.

439
00:45:10,000 --> 00:45:16,000
Use common sense. Just go back and ask yourself, does this answer make sense?

440
00:45:17,000 --> 00:45:25,000
On a quiz, one of my favorite stories, I gave a quiz to calculate a car payment.

441
00:45:25,000 --> 00:45:32,000
The car was like a, back then, $20,000 car, six-year payments.

442
00:45:33,000 --> 00:45:40,000
And several students got monthly payments that were around $10,000.

443
00:45:41,000 --> 00:45:44,000
And one of them came up and complained, well, why is this wrong?

444
00:45:45,000 --> 00:45:51,000
I said, well, look at the answer. Does a $10,000 payment every month on a car make sense?

445
00:45:51,000 --> 00:45:55,000
And she said to me, I don't know, my dad bought my car.

446
00:45:56,000 --> 00:46:02,000
So, that was what I thought about just moving to the mountains and save the hell with life.

447
00:46:03,000 --> 00:46:08,000
But, it happens almost every semester.

448
00:46:09,000 --> 00:46:18,000
So, just look at that. Well, he's holding, and that's not a great interest rate, put the money aside, about $1,300.

449
00:46:18,000 --> 00:46:20,000
That kind of makes sense.

450
00:46:21,000 --> 00:46:29,000
Now, if I got something that was $2.05 or $25,800, that would not have made sense to me.

451
00:46:30,000 --> 00:46:33,000
That would not have been a reasonable answer.

452
00:46:34,000 --> 00:46:43,000
A caution here. Most financial calculators, I would put in just 5.2.

453
00:46:43,000 --> 00:46:51,000
Excel and arithmetic, you have to put it in as the decimal.

454
00:46:52,000 --> 00:46:57,000
Or, in Excel, you'll see me do it, I would type in 5.2 and percent.

455
00:46:58,000 --> 00:47:03,000
That way they visually look right, the way people use them.

456
00:47:04,000 --> 00:47:11,000
But, percent, financial calculators, almost all of them, they let you put in percent almost everywhere.

457
00:47:11,000 --> 00:47:13,000
You don't want to put it in the decimal.

458
00:47:14,000 --> 00:47:18,000
You'll get the wrong answer if you put it in the decimal because they'll think that's the percentage.

459
00:47:19,000 --> 00:47:21,000
But, anyway, there's that.

460
00:47:22,000 --> 00:47:28,000
And, like I said, this is simple enough that, yeah, you could write a quickie little Excel routine to do it,

461
00:47:29,000 --> 00:47:33,000
but it's just about as fast to do it with a scientific calculator.

462
00:47:34,000 --> 00:47:36,000
Now, take this the other way.

463
00:47:36,000 --> 00:47:47,000
Suppose that instead of running forward in time, we wanted to come back in time, get the conversion factor running backward.

464
00:47:48,000 --> 00:47:56,000
We take that formula, FV equals PV times 1 plus R to the T power.

465
00:47:57,000 --> 00:48:03,000
And I'm going to divide both sides by the 1 plus R to the T power.

466
00:48:03,000 --> 00:48:11,000
So the future value over 1 plus R to the T power buys you a present value.

467
00:48:12,000 --> 00:48:16,000
This is how we reel money back in time.

468
00:48:17,000 --> 00:48:19,000
This is a very useful one.

469
00:48:20,000 --> 00:48:26,000
The future value, yeah, it has a few uses, and one of them is very important.

470
00:48:26,000 --> 00:48:34,000
But now, one thing you'll see me do, and this comes from your days in high school algebra,

471
00:48:35,000 --> 00:48:43,000
you'll see me oftentimes write this as FV times 1 plus R to the negative T.

472
00:48:49,000 --> 00:48:53,000
The reciprocal of the denominator is the negative of the power.

473
00:48:53,000 --> 00:49:00,000
You'll see me do it like that, and I have a good reason, and it's just a practical reason.

474
00:49:01,000 --> 00:49:10,000
When you're dividing, the more complicated the denominator is, the more likely you are to screw something up as far as the parenthesis goes.

475
00:49:11,000 --> 00:49:17,000
If I put everything on the same line, it's just a little more likely that you won't make a mistake trying to,

476
00:49:17,000 --> 00:49:22,000
where did I put the parentheses to hold this whole denominator together kind of thing.

477
00:49:23,000 --> 00:49:31,000
It's just my habit, and I encourage you to get kind of into this habit too.

478
00:49:32,000 --> 00:49:39,000
How you key in the exponent, and then you hit that plus-slice-negative button on your calculator if you're using a calculator to do this.

479
00:49:40,000 --> 00:49:44,000
But anyway, there's that in it.

480
00:49:44,000 --> 00:49:57,000
And so, in order to do this one, this lump sum,

481
00:49:57,000 --> 00:50:09,000
what I would do here is, let's have a problem.

482
00:50:10,000 --> 00:50:19,000
You sir, remember I told you you are my son? Yeah.

483
00:50:20,000 --> 00:50:25,000
Okay, here's the problem. I am going to bequeath you $250,000.

484
00:50:25,000 --> 00:50:36,000
Now, you very, you thank me, and then when I'm gone, you go check the actuary tables on mortality to see when I'm going to die.

485
00:50:36,000 --> 00:50:57,000
And it turns out that you will inherit

486
00:50:57,000 --> 00:51:14,000
$250,000 in 18 years.

487
00:51:15,000 --> 00:51:19,000
Yes, that's what the actuarial tables actually would say my life expectancy is.

488
00:51:20,000 --> 00:51:24,000
It's not as simple as, well, the average life expectancy of a North American male is 77.

489
00:51:24,000 --> 00:51:27,000
It's not how you think about it.

490
00:51:28,000 --> 00:51:30,000
You have to think in Bayesian terms.

491
00:51:31,000 --> 00:51:36,000
The person who lives to 65, how many more years past that would that person live?

492
00:51:37,000 --> 00:51:40,000
In other words, it's a conditional probability, but that's another thing.

493
00:51:40,000 --> 00:52:00,000
So what we're going to do, if you discount cash flows at 7.4%,

494
00:52:00,000 --> 00:52:20,000
how much is that inheritance worth to you now?

495
00:52:20,000 --> 00:52:34,000
In other words, what we're saying, in a given interest rate environment, you would be indifferent between $250,000 in 18 years

496
00:52:35,000 --> 00:52:39,000
and what we're going to find out for the number here now.

497
00:52:40,000 --> 00:52:45,000
It's essentially the indifference point between the two amounts of money.

498
00:52:45,000 --> 00:52:53,000
Because whatever I get now, if I got an amount now, I could put it in the bank at 7.4%

499
00:52:54,000 --> 00:52:58,000
and it would become $250,000 in 18 years. That's what we're doing.

500
00:52:59,000 --> 00:53:12,000
So in this case, the present value would be $250,000 times 1 plus.074.

501
00:53:12,000 --> 00:53:22,000
Oh, I forgot to say compounded. I forgot. Compounded. Let's do it compounded monthly.

502
00:53:23,000 --> 00:53:38,000
So we'll divide the.074 by 12 and then pop that to the 12 times 18 years.

503
00:53:38,000 --> 00:53:48,000
The number of compoundings that will happen. 12 times 18 is the number of compoundings that will happen over the life of this problem.

504
00:53:49,000 --> 00:53:58,000
And I forgot to put my negative sign here, talking while I'm trying to do stuff at the same time.

505
00:53:58,000 --> 00:54:12,000
And if we crank this out, clearing this thing out, we would have $250,000 times, open parenthesis,

506
00:54:12,000 --> 00:54:30,000
1 plus.074 divided by 12, close the parenthesis, to the, raise the power, open parenthesis,

507
00:54:30,000 --> 00:54:44,000
12, I'll put the negative right here, positive, times 18, close the parenthesis, and don't forget to hit equals.

508
00:54:45,000 --> 00:54:55,000
I say that because sometimes I forget to do that. It's worth $66,257.66.

509
00:54:55,000 --> 00:55:12,000
66,258, rounded to the nearest dollar.

510
00:55:13,000 --> 00:55:16,000
And again, you ask yourself, does this make sense?

511
00:55:16,000 --> 00:55:28,000
Well, you know, if I'm going to have to wait 18 years for a quarter of a million dollars, yeah, I probably would be happy with about $66,000

512
00:55:29,000 --> 00:55:34,000
if I could have it right now so I could go to Denny's and get the Grand Slim Happy Meal.

513
00:55:35,000 --> 00:55:39,000
Indeed, a real finance for real people.

514
00:55:39,000 --> 00:55:45,000
Now, you've got to open up, you've got a quiz to take, and then that's all I have for you today. I thank you.