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1. What is a loan amortization schedule? How would you use a loan amortization schedule to determine your loan interest rate? What factors would affect your choice between two loans?
1a. The average household gets a new car every 3 years or so. I like to keep a car until it gets close to 200,000 miles on it. That way, I feel like I have gotten my dollars worth from it. We are a culture that thrives on consumer spending. Look at Marketing and how quickly and effectively it creates demand for product. The average household spends about 20% more than it makes per year. Imagine the long term effects of this. Credit is not meant to be used to buy things that we cannot afford. Credit is supposed to be used so we do not carry large amounts of money on hand. It has not worked out that way. Cars and homes and keeping up with the Joneses is a good way to get into financial hardships. Spending less than you make is the first step to getting your finances in line. What are your thoughts on this?
1b. If there is one constant in life it is change. Change in everything including the value of a dollar. We all know that we can buy little with a dollar today. Imagine how little you will be able to purchase ten years from now with a dollar. There has been an ongoing discussion regarding making the penny obsolete. Maybe it would make more sense to begin with a nickel or even a dime. Decades ago, you could actually buy things with a penny, but in today’s economy the penny has become devalued. It actually costs more than a penny to manufacture a penny. At one time, a penny was pure copper. To bring costs down, a penny is made out of an alloy today. Does this seem to make sense? Are we better off without the smaller currencies?
2. What is the difference between present and future values? How would you use present and future value techniques in preparing a financial retirement plan? How would various required rates of return affect the decision? Explain your answer.
2a. A good example of an amortization schedule is provided with home mortgages. I can look at the mortgage that I have been paying on for almost a decade. I have made regular payments on time. However, In the first 5 years of the loan, I paid interest primarily and the principle of the loan barely changed. In the second 5 years, the principle is declining slowly and steadily. Every single month, I get an amortization schedule which lets me know exactly how the loan is changing over time. A great way to pay a loan of early is to make an extra payment every year. If this is done on a 30 year mortgage, it will actually be paid off in only 22 years. If 2 extra payments are made every year, the mortgage will be paid off in 12 years total approximately. What is the purpose of all these interest payments on a loan? 2b. have you all planned out your future spending based on the time value of money?
