Beruflich Dokumente
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Time Value Terminology
ë
× Simple Interest
Interest paid (earned) on only the
original amount, or principal borrowed
(lent).
× ompound Interest
Interest paid (earned) on any previous
interest earned, as well as on the
principal borrowed (lent).
General Future
Value Formula
FV1 = P0(1+i)1
FV2 = P0(1+i)2
etc.
ë m M 5
10%
$10,000
FV5
Ô
tory Problem olution
× alculation based on general formula:
FVn = P0 (1+i)n
FV5 = $10,000 (1+ 0.10)5
= $16,105.10
× alculation based on !able I:
FV5 = $10,000 (FVIF
FVIF10%, 5)
= $10,000 (1.611)
= $16,110 [[ue to Rounding]
^
Present Value
ingle [eposit (Graphic)
Assume that you need $1,000 in 2 years.
Let¶s examine the process to determine
how much you need to deposit today at a
discount rate of 7% compounded annually.
ë 1 2
7%
$1,000
PV0 PV1
Ñ
Present Value
ingle [eposit (Formula)
ë 1 2
7%
$1,000
PV0
më
General Present
Value Formula
PV0 = FV1 / (1+i)1
PV0 = FV2 / (1+i)2
etc.
ÔÔ Ôm j^m
mM
Using Present Value Tables
PV2 = $1,000 (PVIF7%,2)
= $1,000 (.873)
= $873 [Due to ounding]
ri % % %
m
.
m
m m
m
Example
Îour rich grandmother promises to give
you $10000 in 10 years¶ time. If interest
rates are 12% per annum, how much is
that gift worth today?
X
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X
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tory Problem Example
uulie Miller wants to know how large of a
deposit to make so that the money will
grow to $10,000 in 5 years at a discount
rate of 10%.
ë m M 5
10%
$10,000
PV0
m
6.116 yrs
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The Rule of 72
× !he µule of 72¶ is a handy rule of thumb
that states:
If you earn r % per year, your
money will double in about 72 / r %
years.
× For
example, if you invest at 6%, your
money will double in about 12 years.
3. $373.83 7. 8%
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ánnuities
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Types of ánnuities
× ârdinary Annuity
Annuity: Payments or
receipts occur at the end of each
period.
× Annuity Due:
Due Payments or
receipts occur at the beginning of
each period.
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Parts of an ánnuity
nd of nd of nd of
Period 1 Period 2 Period 3
0 1 2 3
Parts of an ánnuity
(Annuity Due)
Beginning of Beginning of Beginning of
Period 1 Period 2 Period 3
0 1 2 3
FVAn
FVAn = (1+i)n-1 + (1+i)n-2 +
... + (1+i)1 + (1+i)0
MÔ
Example of an
ârdinary ánnuity -- FVá
ash flows occur at the end of the period
0 1 2 3 4
7%
$1,000 $1,000 $1,000
$1,070
$1,145
FVA3 = $1,000(1.07)2 +
$1,000(1.07)1 + $1,000(1.07)0 $3,215 = FVA3
= $1,145 + $1,070 + $1,000
= $3,215
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Valuation Using Table III
FVAn = (FVIFAi%,n)
FVA3 = $1,000 (FVIFA7%,3)
= $1,000 (3.215) = $3,215 (D to )
ri % % %
m m m m
m .
m
MÑ
§uture Value of an ánnuity
× FVA =[ n
(1+i) ±1 ]
i
[
1000 (1+0.07)3 ±1] = $3214.9
0.07
ë
âverview View of an
ánnuity [ue -- FVá[
ash flows occur at the beginning of the period
0 1 2 3 n-1 n
i% . . .
$1,145
$1,225
FVAD3 = $1,000(1.07)3 + $3,440 = FVAD3
2
$1,000(1.07) + $1,000(1.07) 1
FVADn = (FVIFAi%,n)(1+i)
FVAD3 = $1,000 (FVIFA7%,3)(1.07)
= $1,000 (3.215)(1.07) = $3,440 (D to )
ri % % %
m m m m
m .
m
âverview of an
ârdinary ánnuity -- PVá
ash flows occur at the end of the period
0 1 2 n n+1
i% . . .
= Periodic
ash Flow
PVAn
PVAn = /(1+i)1 + /(1+i)2
+ ... + /(1+i)n
Example of an
ârdinary ánnuity -- PVá
ash flows occur at the end of the period
0 1 2 3 4
7%
$1,000 $1,000 $1,000
$ 934.58
$ 873.44
$ 816.30
$2,624.32 = PVA3 PVA3 = $1,000/(1.07)1 +
$1,000/(1.07)2 +
$1,000/(1.07)3
= $934.58 + $873.44 + $816.30
= $2,624.32
Valuation Using Table IV
PVAn = (PVIFAi%,n)
PVA3 = $1,000 (PVIFA7%,3)
= $1,000 (2.624) = $2,624 (D to )
ri % % %
m
m m m
M. M
m
m m
j
Present Value of an
ánnuity
× PVA = 1± 1
(1+i)n
i
10001 ± 1 (1 + 0.07)3 =
$2624.3
0.07
Ô
âverview of an
ánnuity [ue -- PVá[
ash flows occur at the beginning of the period
0 1 2 n-1 n
i% . . .
@
PVADn
PVADn = (PVIFAi%,n)(1+i)
PVAD3 = $1,000 (PVIFA7%,3)(1.07)
= $1,000 (2.624)(1.07) = $2,808 (D to )
ri % % %
m
m m m
M. M
m
m m
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Perpetuity
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è áPLè
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olving for the
ánnuity Payment
× Suppose we want to know the
amount that we have to deposit in
order to accumulate a given sum
after a number of years
e.g $10,000 down payment required
after 5 years ow much you need to
save every year at 4 % interest rate?
omputations Using
Table III
×FVAn = (FVIFAi%,n)
$10,000 = (FVIFA4%,5)
$10,000 = (5.416)
= $1846.38
omputations
Using Formula
Ú
X
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X
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X
X
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omputations Using
Table III
× FVAn = (FVIFAi%,n)
× $10,000 = 1846.27 (FVIFA4%,n)
(FVIFA4%,n) = (5.416)
n = 5 periods
i,e 5 years
Ô
omputations
Using Formula
Ú
X
ë Ú
ëëëë X
ëë
Ú
ë X ë
ÚÚ
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olving for the interest rate
in an annuity (i)
×Suppose we want to know
interest rate now and the other
things are known to us.
× .g using the same example we
would find the interest rate and
hence verify that it is 4%.
Ñ
omputations Using
Table III
× FVAn = (FVIFAi%,n)
$10,000 = 1846.27 (FVIFAi%,5)
(FVIFAi%,5) = (5.416)
i = 4%
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omputations
Using Formula
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pixed Flows Example
uulie Miller will receive the set of cash
flows below. What is the Present Value
at a discount rate of 10%
10%?
ë m M 5
10%
$600 $600 $400 $400 $100
PV0
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How to olve?
1. Solve a ³piece
piece--at- timel by
at-a-time
discounting each piece back to t=0.
2. Solve a ³group
group--at- timel by first
at-a-time
breaking problem into groups of
annuity streams and any single
cash flow group. !hen discount
each group back to t=0.
Piece--át-
Piece át-á-Time´
ë m M 5
10%
$600 $600 $400 $400 $100
$545.45
$495.87
$300.53
$273.21
$ 62.09
$1677.15 = PV0 of the Mixed Flow
Group--át-
Group át-á-Time´ (#1)
ë m M 5
10%
$600 $600 $400 $400 $100
$1,041.60
$ 573.57
$ 62.10
$1,677.30 = PV0 of Mixed Flow [Using !ables]
$600(PVIFA10%,2) = $600(1.736) = $1,041.60
$400(PVIFA10%,4) ± $400(PVIFA10%,2)
=$400(3.170)± $400(1.736) = $573.60
Plus
$100
$62.10
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Present Value of
pultiple Cash Flows Example
× Îou deposit $1,500 in one year, $2000 in two
years and $2,500 in three years in an account
paying 10% interest per annum. What is the
present value of these cash flows?
Ô
Future Value of
pultiple Cash Flows Example
× Îou deposit $1,000 now, $1,500 in one year,
$2,000 in two years and $2,500 in three years in
an account paying 10% interest per annum. ow
much do you have in the account at the end of
the third year?
$1 000 (1.10)3 = $1 331
$1 500 (1.10)2 = $1 815
$2 000 (1.10)1 = $2 200
$2 500 1.00 = $2 500
!otal = $7 846
^
·neven eries of Payment Date
( án èample)
B ow will c iv h s of c sh flows b low. Wh
is h s V lu discou of 10%?
10% If
B ow w s d posi i g h c sh flows i s d d i h
Fu u V lu h s discou
Î m
V = $2870.92
Ñ FV = $5086.01
Effective ánnual
Interest Rate
ffective Annual Interest ate
!he actual rate of interest earned
(paid) after adjusting the nominal
rate for factors such as the number
of compounding periods per year.
(1 + [ i / m ] )m - 1
jë
ËW¶s Effective
ánnual Interest Rate
Ëasket Wonders (ËW) has a $1,000
D at the bank. !he interest rate
is 6% compounded quarterly for 1
year. What is the ffective Annual
Interest ate ( A
A)?
A = ( 1 + 6% / 4 )4 - 1
= 1.0614 - 1 = .0614 or 6.14%!
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Frequency of Compounding
General Formula:
FVn = PV0(1 + [i/m])mn
n: Number of Îears
m: ompounding Periods per Îear
i: Annual Interest ate
FVn,m: FV at the end of Îear n
PV0: PV of the ash Flow today
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Impact of Frequency
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Comparison different
effective rates of return?
× An investment with monthly payments is different
from one with quarterly payments. Must put each
return on an FF% basis to compare rates of
return. Must use FF% for comparisons. See
following values of FF% rates at various
compounding levels.
AANNUAL 10.00%
A UA! LÎ 10.38%
AMâN!LÎ 10.47%
ADAILÎ (365) 10.52%
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ámortizing a loan
jÔ
teps to ámortizing a Loan
( án âverview)
1. alculate the payment per period.
2. Determine the interest in Period t.
(Loan balance at t-1) x (i% / m)
3. ompute principal payment in Period t.
(Payment - interest from tep 2)
4. Determine ending balance in Period t.
(Ëalance - principal payment from tep 3)
5. Start again at Step 2 and repeat.
j^
ámortizing a Loan Example
uulie Miller is borrowing $10,000 at a
compound annual interest rate of 12%.
Amortize the loan if annual payments are
made for 5 years.
Step 1: Payment
PV0 = (PVIFA i%,n)
$10,000 = (PVIFA 12%,5)
$10,000 = (3.605)
= $10,000 / 3.605 = $2,774
jÑ
ámortizing a Loan Example
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