Finance Principles 215 Essay

426 words - 2 pages

N, i%, PV, PMT, FV, CHS (-ve), g=BEG, g=END, CL
Ch 3&4- Time Value of Money
1. –Future Value:Amount into which an investment
2. will grow after earning interest for a given period
3. of time.
4. 1. Single Cashflow:
* - Compounding to FV = PV(1 + i%)n
* - Discounting to PV = FV (1 + i%)- n
* 2. Annuities:Series of EQUAL CFs at regular
* periods/Intervals.
* -Special case: Bonds/Loans(personal, business,
* mortgages)/ Life insurance.
* - Ordinary Annuity [OA]: Annuity with 1st CF
* starting at the END of Period 1 (Compounding
* Period). 0
1
3
2
PV
FV
END
Period 1
$100 – 1st CFs
$100
$100

*
*
*
*
*

...view middle of the document...


What is the value of the investment today?

An investor borrows $5,000 today for 3 years
at a rate of 12% per year, compounded annually.
How much are his annual repayments
if his first repayment is today?

FV of Annuity:
[OA]:-


[AD]:-
BEGIN


Deferred Annuity[ DA]:[OA] ŵ delay 1st CFs (PMT).
1st PMT is postponed by no. of periods.
-PV is 1 period on the left of the Annuity.
What is the present value (t=0) of a 3 payments of
$100 starting in year 4, if the required
rate of return is 12%?
0
1
2
3
4
5
6
7
100
100
100
240.18

1.


0
1
2
3
4
5
6
7
100
100
100
170.82
240.18

5. 2.


Combining this into a single equation:





Generic equation: (d= no. of periods 1st CFs defer.)




PV of Uneven CFs:

0
1
2
3
5
16
5
-20




Perpetuity:{OA} that cont. forever. (No FV- ∞)
An investor wants to buy 1000 non-redeemable
9% preference shares priced at $1 each.
If the interest rate is 12%, what is the present
value of the investment?

1
0
2
$90

Growing Perpetuity [GP]:

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