1. Would you rather have a savings account that paid 4 percent interest, compoun
ID: 2358044 • Letter: 1
Question
1. Would you rather have a savings account that paid 4 percent interest, compounded on a monthly basis, or one that compounded interest on an annual basis. Why? 2. The interest on your home mortgage is tax deductible. Why are the early years of the mortgage more helpful in reducing taxes than in the later years? 3. How are the present value and future value related? 4. List and describe the purpose of each part of a time line with an initial cash inflow and a future cash outflow. Which cash flows should be negative and which positive?Explanation / Answer
I choose monthly comopounded intrest
as in montle compounding the intrest wil bemore than normal
for ex 1 deposited $1000 dollar intrest rate 4%
at the edn of year componding monthly I get
40.74 $
when as in normal i Get 40 $ so intrest will be more
If you are going to be putting the money you are accumulating into a non-interest bearing account, you will save more if you pay extra monthly. If you are putting the money into an interest bearing account and the interest rate that you will be earning is higher than the interest rate you are paying on your mortgage, you will end up with more money if you accumulate a chunk of money to pay off. Both of these things will either lower your monthly payments (the latter doing it all at once, the former over a period of time) or result in your paying off your mortgage early. Early mortgage payments might save you a little money (I'm assuming you mean something along the lines of my mortgage payment is due on the 21st and I pay it on the 1st), but not a whole lot by itself.
The tax deduction for mortgage interest
Interest you pay on your mortgage is a tax deduction. That means that if you have an income of $100,000 and you pay $5,000 in interest you will taxed on $95,000 of your income. This means that if the marginal tax rate (highest tax bracket you are in) is 25% you will save $1,250 off your tax bill. If it was a tax credit (and I have never heard anything that says it is) you would receive $5,000 off your tax bill.
Personally, I think that in most cases, keeping your mortgage around to get a tax break doesn't make sense since in my example you would still be out of pocket $3,750. There may be something here that I do not know about however.
c)The present value is the reciprocal of the future value.
The relationship is that present value is the current value of future cash flows discounted at the appropriate discount rate. Future values are the amount a present value investment is worth after one or more periods.
We learn everything we can in the present so we have some of the answers for the future and what we don't know we ask the pros about.
The difference between the two is contributed by time. The value of something (an asset) may typically increase over a period of time. $100 that you give me today is not the same as $100 you give a year later. There is an interest (or return) that accrues when you pay me $100 a year later.
The future value after n years of an amount P where R is the rate of interest (in percentage) is calculated as P(1+R/100)**n : using compound interest.
If R =50 (that is 50% rate of return, I know it is high) and n = 2 years, the future value of P is P*1.5*1.5=2.25P where is today's value.
The Present value can be calculated from the future value as P = F/( (1+R/100)**n )
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