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HW Unit 1: Introduction (60 points)
1. “Give Fees an Inch and They’ll Take a Mile” from the Wall Street Journal, 3/14/2014 - corresponds to Ex 1 in Unit 1
In a recent bulletin the Securities & Exchange Commission (S.E.C.) noted that, while investment fees may seem inconsequential at first, “over time they can have a very profound impact on investment returns.” To illustrate, the S. E. C. considered the impact of fees in a simple situation: a 1% annual fee on a $100,000 portfolio that grew 4% annually over 20 years. The S. E. C. claimed that this investment would grow to about $180,000 over 20 years, whereas without fees it would have grown to about $220,000. Use Excel to answer the following:
(a) What exactly does the investment grow to without fees? (for practice only – don’t hand in)
(b) What exactly does the investment grow to with a 1% fee? (for practice only – don’t hand in)
(c) What is the $ difference in your answers from (a) and (b) above. How much of this difference comes from the direct cost of the fees and how much comes from the opportunity cost of the fees? (for practice only – don’t hand in)
Footnote: The WSJ article concludes with a famous quote from John Bogle, the founder of the Vanguard investment company: “In investing you get what you don’t pay for.”
2. Car Purchase Problem (25 points)
You are looking at buying a car after graduation, and you want to determine how much the monthly payment will be.
(a) Use the PMT() function in Excel to calculate the payment for a $20,000 car with a 4% annual rate for 72 months. (5 points)
(b) Now you want to see how much the monthly payment will be with the rates 0%, 1%, 2%, 3%, 4% and 5%. Find your corresponding payments by using Excel formulas with relative (for the interest rate) & absolute referencing (for the $20,000 car cost and the 72 months loan duration). (5 points) Also turn in your formula sheet. (another 5 points)
(c) Using the points from part (b), construct a scatter chart to
1. “Give Fees an Inch and They’ll Take a Mile” from the Wall Street Journal, 3/14/2014 - corresponds to Ex 1 in Unit 1
In a recent bulletin the Securities & Exchange Commission (S.E.C.) noted that, while investment fees may seem inconsequential at first, “over time they can have a very profound impact on investment returns.” To illustrate, the S. E. C. considered the impact of fees in a simple situation: a 1% annual fee on a $100,000 portfolio that grew 4% annually over 20 years. The S. E. C. claimed that this investment would grow to about $180,000 over 20 years, whereas without fees it would have grown to about $220,000. Use Excel to answer the following:
(a) What exactly does the investment grow to without fees? (for practice only – don’t hand in)
(b) What exactly does the investment grow to with a 1% fee? (for practice only – don’t hand in)
(c) What is the $ difference in your answers from (a) and (b) above. How much of this difference comes from the direct cost of the fees and how much comes from the opportunity cost of the fees? (for practice only – don’t hand in)
Footnote: The WSJ article concludes with a famous quote from John Bogle, the founder of the Vanguard investment company: “In investing you get what you don’t pay for.”
2. Car Purchase Problem (25 points)
You are looking at buying a car after graduation, and you want to determine how much the monthly payment will be.
(a) Use the PMT() function in Excel to calculate the payment for a $20,000 car with a 4% annual rate for 72 months. (5 points)
(b) Now you want to see how much the monthly payment will be with the rates 0%, 1%, 2%, 3%, 4% and 5%. Find your corresponding payments by using Excel formulas with relative (for the interest rate) & absolute referencing (for the $20,000 car cost and the 72 months loan duration). (5 points) Also turn in your formula sheet. (another 5 points)
(c) Using the points from part (b), construct a scatter chart to