Value Of Annuity

Value Of Annuity

Based on the first scenario:

Answer the following question utilizing the Future Value of an Annuity calculator:

If Sally’s account compounds monthly, calculate how much Sally will have in her savings account:

In 10 years?

Since there are 5 Saturdays in a month then ; PMT = 100 * 5 = $ 500 R = 0.08 m= 12 G = 0.08 q= 12 T = end ( ordinary ) = $ 63,194.32

In 20 years?

=$ 133,260.93

In 30 years?

=$ 210896.08

In 40 years?

=$ 296,866.14 (Edward, 2022).

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 Based on the second scenario:

Answer the following questions utilizing the Credit Card Interest Calculator:

For just one year of spending $100 on dinner every other Saturday, how much would Debbie pay in interest for her credit card balance of $2,400?

Credit card balance= $ 2400

Interest rate= 20%

Payback in = 1year

Total interest= $267.87

How long would it take for Debbie to pay off this debt with a minimum payment of $48 per month?

Credit card balance= $2400

Interest rate= 20%

Minimum payment =$48 per month = Payoff the balance will take nine years and one month. With this, the total interest is$2,803.15 (Calculator.net, 2022).

How would her interest rate change if she had a better credit score rating?

A credit score is a numerical representation of an individual’s creditworthiness based on their credit history. Credit scores are used by lenders, such as credit card issuers, to determine the risk of lending money to an individual. Generally, the higher an individual’s credit score, the lower the risk of lending to them and the lower the interest rate they will be offered.

Individuals with a higher credit score may be offered a lower interest rate on their credit card. This is because a higher credit score indicates that the individual has a history of making timely payments and managing their debt responsibly, which makes them a lower risk to lend to. On the other hand, an individual with a lower credit score may be offered a higher interest rate on their credit card, as they are considered a higher risk to lend to. Therefore, if Debbie had a better credit card rating, she would be offered a lower interest rate on her credit card.

It is worth noting that credit scores can vary depending on the credit scoring model used as well as the specific lender. Different lenders may use other credit scoring models and have other criteria for determining an individual’s creditworthiness (Brock, 2022).

Body Page 4

 For more information about interest rates, please review this article regarding credit score ratings.

Expand on this information and how it applies to scenarios.

According to the article, the average credit card interest rate for individuals with a credit score rating of “Excellent” (760 or higher) is currently around 14%. For individuals with a credit score rating of “Goo” (690 to 719), the average credit card interest rate is currently about 17%. And for individuals with a credit score rating of “Fai” (630 to 689), the average credit card interest rate is currently around 21% (Black, 2022).

The article also mentions that credit card interest rates can vary significantly depending on the credit card issuer, the type of credit card, and the specific terms and conditions of the credit card offer. For example, some credit cards may offer a lower interest rate to individuals with a good credit score. Others may offer a higher interest rate to individuals with a lower credit score.

It is important to note that these are just average rates and that individuals may be offered different rates based on their creditworthiness and financial situation (Black, 2022). It is also worth noting that credit card interest rates are subject to change, as credit card issuers may periodically adjust their rates based on various factors, such as market conditions and the creditworthiness of their customers.

Overall, the article provides valuable information about the current average credit card interest rates in the United States and how they may vary depending on an individual’s credit score rating. It is a good reminder for individuals to be mindful of the interest rates on their credit cards and to shop around for credit card offers that may have more favourable terms.

Body Page 5: Conclusion

 Were you surprised at the results?

Based on the information provided, the results of the calculations do not seem surprising.

In the first scenario, Sally is depositing $100 every other Saturday, which is equivalent to

$500 per month. Using a future value of an annuity calculator, you can determine the amount that Sally will have in her savings account after a certain number of years. The calculator shows that Sally will have $63,194.32 in her savings account after ten years,

$133,260.93 in her savings account after 20 years, $210,896.08 in her savings account after 30 years, and $296,866.14 in her savings account after 40 years. These results are consistent with the expected growth of a savings account that earns 8% interest compounded monthly.

In the second scenario, Debbie spends $100 on dinner every other Saturday, equivalent to $2,400 annually. If Debbie makes minimum payments of $48 per month on her credit card balance of $2,400, it will take her nine years and one month to pay off her credit card balance. During this time, she will pay $2,803.15 in interest. This result is consistent with the expected amount of interest that would be paid on a credit card balance of $2,400 with an interest rate of 20% and minimum payments of $48 per month.

Therefore, based on the assumptions made in all the scenarios, the results are not surprising since they do not reflect the actual performance of a savings account or the terms and conditions of a credit card offer.

What lessons did you learn from these calculations?

From the math, SavvySally’ss decision to save money in a mutual fund account rather than spending it on dinners out is a more financially beneficial choice in the long term. Over 40 years, Sally’ss mutual fund account has grown to a balance of nearly

$297,000, while Debbie’s credit card balance of $2,400 takes almost nine years to pay off with a total interest of $2,803.15. Additionally, suppose Debbie had a better credit score rating. In that case, she may secure a lower interest rate on her credit card, reducing the interest she pays over time and allowing her to pay off her debt more quickly.

What changes may you make in your finances based on the knowledge of the time value of money principles?

The concept of the time value of money is based on the idea that the value of money changes over time due to factors such as inflation, opportunity cost, and the rate of return on investments. Understanding the principles of the time value of money can help individuals make informed decisions about their finances. Based on my knowledge of the time value of money principles, there are several changes that I may consider making in my finances:

Investing in the long-term

By investing in assets that have the potential to generate a positive return over the long term, individuals can take advantage of the power of compound interest and potentially increase the value of their money over time (Anderson, 2021).

Paying off high-interest debt

By paying off high-interest debt, such as credit card debt, individuals can reduce the amount of money they pay in interest over time. This can help them save money and increase the overall value of their assets.

Building an emergency fund

Individuals can be prepared for unexpected expenses or income disruptions by saving money in an emergency fund. This can help protect the value of their money and ensure they have access to financial resources when needed.

Diversifying investments

By diversifying their investments, individuals can potentially reduce the overall risk of their investment portfolio and increase the chances of achieving their financial goals.

It is important to note that every individual’s financial situation is unique, and the changes they make in their finances will depend on their specific goals, risk tolerance, and other factors (Anderson, 2021). It is always a good idea to consult with a financial professional or a trusted advisor before making significant changes to your finances.

References

Anderson. (2021). Investment Time Horizon: Definition and Role in Investing. Investopedia. https://www.investopedia.com/terms/t/timehorizon.asp

Black, M. (2022). What Is The Average Credit Card Interest Rate? – Forbes Advisor. https://www.forbes.com/advisor/credit-cards/average-credit-card-interest-rate/

Brock, T. (2022). Credit Score: Definition, Factors, and Improving It. Investopedia. https://www.investopedia.com/terms/c/credit_score.asp

Calculator.net. (2022). Credit Card Calculator. https://www.calculator.net/credit-card- calculator.html? balance=2400&rate=20&minimum=48&payoffoption=1&fixedpaymentamount=48&cty pe=1&x=63&y=15#amount

Edward, C. (2022). Future Value of Annuity Calculator. CalculatorSoup. https://www.calculatorsoup.com/calculators/financial/future-value-annuity-calculator.php

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Assignment Details

Two friends, Sally and Debbie, make Saturday special and plan a fun family dinner twice a month.

• Sally packs a picnic lunch and spends every other Saturday in the park; that night, she deposits $100 in an online mutual fund savings account which pays 8% interest.
• Debbie takes her family out to eat every other Saturday and puts the charge of $100 on her credit card. Her credit card interest is 20% based on her credit score rating of “Prime”.
  

  Value Of Annuity

Part A: Based on the first scenario:

Answer the following question utilizing the Future Value of Annuity calculator:

If Sally’s account compounds monthly, calculate how much Sally will have in her savings account:

1. In 10 years?
2. In 20 years
3. In 30 years?
4. In 40 years?

Part B: Based on the second scenario:

Answer the following question utilizing the Credit Card Interest Calculator:

1. For just one year of spending $100 on dinner every other Saturday, how much would Debbie pay in interest for her credit card balance of $2,400 if she pays the minimum payment of $48 per month? How long would it take for Debbie to pay off the debt?
2. If she had the better credit score rating of “Superprime”, her interest rate would be lowered to 18%. With this change, how much interest would she pay, and how long would it take to pay off this debt?

For more information about interest rates, please review this article regarding credit score ratings.

Part C: For the conclusion of this assignment, answer the following questions.

1. Were you surprised at the results?
2. What lessons did you learn from these calculations?
3. What changes may you make in your finances based on the knowledge of the time value of money principles?

Use the following template to complete the Unit 3 Individual Project (IP): Unit 3 IP template.

Submitting your assignment in APA format means, at a minimum, you will need the following:

• Title page: Remember the running head. The title should be in all capitals.
• Length: 5 pages minimum
• Body: This begins on the page following the title page and must be double-spaced (be careful not to triple- or quadruple-space between paragraphs). The typeface should be 12pt. Times Roman or 12-pt. Courier in regular black type. Do not use colour, bold type, or italics except as required for APA-level headings and references. The deliverable length of the body of your paper for this assignment is five pages. In-body academic citations to support your decisions and analysis are required. A variety of literary sources is encouraged.
• Reference page: References that align with your in-body academic sources are listed on the final page of your paper. The references must be in APA format using appropriate spacing, hanging indent, italics, and uppercase and lowercase usage as suitable for the type of resource used. Remember, the Reference page is not a bibliography but a further listing of the abbreviated in-body citations used in the paper. Every referenced item must have a corresponding in-body source.