Rasmussen College Module 2 Time Value of Money Presentation Course Project For this part of the course project, you will demonstrate your understanding of
Rasmussen College Module 2 Time Value of Money Presentation Course Project For this part of the course project, you will demonstrate your understanding of the time value of money.
In your role as a financial advisor at Eagle Consulting, you will be meeting a potential customer, Keith Jones. Mr. Jones customer is 35 years old and married with two children, and he would like your help in planning a long-term investment strategy with the $100,000 he has to invest. In advance of your meeting, you decide to create a PowerPoint presentation that will educate Mr. Jones on the underpinnings of the time value of money. In doing so, your goal is to help your client understand the basic construct that a dollar today is more valuable than a dollar received tomorrow.
To complete this assignment, do the following:
Refer to the Eagle Consulting Info Sheet you downloaded for the previous course project piece
Develop a 6-screen PowerPoint presentation with accompanying lecture notes that:
Explains the concept of the time value of money
Provides examples of how time value of money calculations are determined
The presentation should include the following slides and accompanying lecture notes. The slide content should be brief and include supporting images or diagrams where appropriate. Use the Notes area beneath each slide to put the accompanying lecture notes for the slide.
Slide
Content
1
Title Slide
2
Slide Content: Main ideas of the time value of money
Lecture Notes (100-150 words)
Provide an explanation/definition of the time value of money.
Explain why understanding the time value of money is important to investors.
Explain the risk for investors in not understanding the time value of money.
3
Slide Content: Step-by-step example of a present value calculation using numbers
Lecture Notes (100-150 words):
Explain the present value formula.
Explain how changing the variables in the formula will affect the investment outcome.
4
Slide Content: Step-by-step example of a future value calculation using numbers
Lecture Notes (100-150 words):
Explain the future value formula.
Explain how changing the variables in the formula will affect the investment outcome.
5
Slide Content: Identify impacts of compounding on the calculation of present value and future value
Lecture Notes (100-150 words):
Provide examples of how compounding impacts both the present value and future value of investments.
6
Slide Content: Summarize the main points of the time value of money concepts.
Lecture Notes (100-150 words):
Explain why these concepts are critical to an investor. Eagle Consulting and Financial Services, Inc
RECOMMENDATION REPORT
Retirement Plan for Melinda Jacobsen
Prepared by: Desmond Fulton CFP®
Eagle Consulting and
Financial Services Inc
Address:123 apple ln,
charlotte NC, 28269
Work Phone: (123)
456-7890
Email: des@yahoo.com
Introduction
Owing to effects of inflation, Federal Reserve policies and changes in the economy, proper
financial management is imperative for retirees. This report is prepared on basis of other
additional information and is meant to aid Ms. Melinda Jacobsen in analyzing financial options
available on her retirement plan. The financial analysis cover on Federal Reserve policies and their
effect on interest rates, loan options and mortgage plan.
Federal Reserve Policies
The government of the United States has the power to control the economy through monetary
policies. These policies are meant to affect interest rates also referred as borrowing cost. They
comprise of discount rates, open market operations, and reserve requirements. This financial plan
talks about how the government imposes them, their effect to the economy and how they affect
investment plans of Ms. Melinda.
Discount Rates
The Federal Reserve has the power to influence the cost of borrowing by increasing or decreasing
the lending rates. In essence, commercial banks borrow funds from the Federal Reserve at a given
rate. The funds obtained from the Fed by commercial banks are availed to individuals and
institutions in form of loans.
If the Fed increases the interest rate on lending to commercial bank, the banks will increase their
interest rates on loans hence discouraging borrowings. On the contrast, if Fed reduces the lending
rates, commercial banks also reduce their lending to individuals and institutions hence encouraging
borrowing.
Open Market Operation
In order to regulate the supply of money, the Fed can buy or sale securities from the public. The
policy is applicable where; if the Fed wants to inject funds in the market it will buy treasury bills
and bonds to the public. Conversely, if the aim is to reduce amount of money in supply, the Fed
will sale the same securities to the public hence wiping out excess cash from the public.
When the Fed sells securities in the market, the amount of money in supply drastically reduces.
This leads to increase in the interest rate charged on bank loans and mortgage markets. Conversely,
when the Fed buys the securities, the amount of funds available in the economy increases, this
leads to decline in interest rates charged by the banks and consequentially decline in cost of
mortgage and bank borrowings.
Reserve requirement
As noted above, commercial banks borrow funds from the Fed at a fee known as discount rate.
The borrowed funds are then given to the financial institutions, individuals at a relatively higher
interest. Just like commercial banks and other lending institutions, the Fed requires security to be
held as collateral in order to advance these loans. The security is normally funds, held inform of
reserves. At liberty, the Federal Reserve has the authority to require commercial banks to increase
or decrease the amount of these reserves.
When the Fed requires the commercial banks to increase their reserves, the amount of money left
in the bank faults is low. Since demand for loans from the individuals and institutions is still high,
commercial banks will raise the interest rate on borrowing to compensate for few funds available.
Conversely, if the Fed reduces reserve ratio, commercial banks will have a lot of money to lend.
Hence, the cost of borrowings as indicated by interest rate will decline.
The Implication of Federal Reserve Policy to Ms. Melinda
The effect of borrowing rate also affects interest rate on long term savings. Notably, low borrowing
cost implies that there is too much funds available for lending. To adjust the risk and return
principle, commercial banks will reduce their interest rates on fixed and long-term investments
since cheap funds are easily available from the Fed.
Loan Option
Mortgage options in the United States are varied. They take many forms, fixed, adjustable, balloon,
reverse or government backed mortgages among others. Based on mortgage rates obtained from
www.zillow.com, 30-year fixed rate mortgages will bear interest rate of 3.64%, 20-year fixed rate
mortgage will bear a rate of 3.46%, and 15-year fixed rate mortgage will have a rate of 3.16%
while a 10-year fixed rate mortgage will have a rate of 3.07%. This data can be plotted graphically
as shown below.
Type of Curve Presented
The mortgage market presented on the graph above exhibits a normal curve. This implies that the
mortgage is reasonably stable. Typically, a normal curve indicates that long-term loans attract
higher yield. Evidently, a 30-year fixed rate mortgage attracts interest rate yield of 3.64% which
is higher than 3.46% under 20-year period.
Relationship between Interest Rates and Years to Maturity
The mortgage market dictates that the longer the period, the higher the return. This principle stems
from financial metrics where invested funds rationally accumulate on interest and compounds
annually. Also, short investment horizons attract low risk of loss. In tandem with risk and return
principle, short-term mortgages ought to attract less interest.
Risk of Inflation on Longer Investments
Inflation rate risk is higher on mortgage returns which spread over a long period of time. The
assertion is based on the time value of money principle. Notably, even though the value of return
will be higher in the long-run, the rate of inflation is also poised to increase.
Recommendation
In consideration to financial information, Ms. Melinda Jacobsen should opt for 10-year mortgage.
Primarily, Ms. Jacobsen expects to retire after the tenth year. The mortgage rate for a 10-year
period is 3.07%. Contrast to 15 year, 20-year and 30-year interests of 3.16%, 3.46% and 3.64%
respectively, Ms. Melinda will be able to repay refinanced loan in time. It is also interesting to
note that the difference in the rates is not significant to necessitate for long-term loans.
Pros of 10-year mortgage plan
Notably, full payment of the mortgage will imply that Melinda does not carry a loan obligation on
her retirement. It is prudent to note that, mortgage cost is a burden to retirees since one cannot earn
from the investment. Secondly, paying the mortgage while in employment enables one to enjoy
tax deductions. Thirdly, retirees have a lot of time to invest in other endeavors, as such; tying
financial cash flows to a mortgage deters any prospects of investment in retirement period.
Introduction to Eagle Consulting and Financial Services, Inc.
Eagle Consulting and Financial Services is a company offering a range of financial advisory and consulting
services to individuals and business. Eagle focuses on solving clients most challenging issues with a
cross-disciplinary approach that encompasses everything from enterprise improvement and financial
advisory services to information management, leadership and organizational effectiveness, and
turnaround and restructuring.
Eagles vast experience and specialized expertise enables the company to serve a wide range of
businesses and industries, whether they are healthy, challenged, or distressed, as well as business
owners and other individuals.
Services for Individuals
The Wealth Management team at Eagle works with individuals to deliver services and solutions that help
build, preserve, and manage wealth. The mission of every financial advisor is to understand the
aspirations of each and every client and help them achieve their goals.
Services provided to individual investors include:
Wealth planning
Investment management
Cash management
Lending solutions
Estate planning
Services for Businesses
The Business Advisory team specializes in a wide array of enterprise-wide solutions. The team tailors
their services to the specific needs of the client, whether addressing an isolated business challenge;
integrating resources across departments, divisions or continents; or serving in interim leadership roles
to steer a firm through a period of change. The Eagle suite of services address all aspects of the business
life cycle to help clients overcome complex operational and financial issues, uncover new opportunities,
minimize risk, and maximize value.
Services provided to businesses include:
Enterprise improvement
Financial advisory services
Information management
Leadership and organizational effectives
Turnaround and restructuring
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