12 Feb 2010 TMV

LOS 5.a interest rates as required rate of return, discount rate or opportunity cost
Interest rates is measure of TMV Risk difference of securities led to different in equilibrium (investor and saver) rate of interest rates Discount rates or interest rate borrow at beginning and the give a!ment in future " ortunit! #ost or interest rate $ additional mone! that can be earned if we don%t s end now (saving rather or ost oning consum tion)

LOS 5.b interest rate as sum of real risk free rate, expected inflation, premium because of different risks
Real risk free rate of interest is theoretical rate on a single eriod loan that has not e& ectation of inflation Real rate of return investor increase in urchasing ower after ad'usting inflation T (ill rates have nominal risk free rates )ominal risk free rates * real risk free rates + e& ected inflation rate Required rate on securit! * nominal risk free rate + default risk remium + liquidit! remium + maturit! risk remium

LOS 5.c Calculate and interpret effective annual rate, given t e stated annual rate and compounding frequency
,-R effective annual rate * (. + eriodic rate)m $ . /tated rate * ,-R if and onl! if com ounding frequenc! * . !ear 0reater the com ounding frequenc! greater will be effective rate as com are to stated rate

,&am le1 #alculate ,-R if stated annual rate is .23 com ounded quarterl! 4eriodic Rate * 56.278 * 5659

,-R * (. + 659)8 . * 56.2:: *; .26::3 ,&am le1 <sing stated rate of =3> com ute ,-R%s for semi annuall!> quarterl!> monthl! and dail! com ounding /emi annuall! * (. + 65=72)2 $. * =65?3 @uarterl! * (. + 65=78)8 $. * =6.83 Monthl! * (. + 65=7.2).2 $. * =6.A3 Dail! * (. + 65=79=:)9=: $. * =6.B3 #ontinues * eannual rate $ . * =6.B3 CV * 4V (. + i7n)n! CV * 4V(e! .)

LOS 5.d ! Calculate and interpret "# and $# for single sum of money, ordinary annuity, an annuity due, a perpetuity %$# only& and series of unequal cas flo'
Cuture Value #alculation CV * 4V(. + I7D)) I7D * rate of return er com ounding eriod and ) * number of com ounding eiod (. + I7D)) * com ounding rate on investment or future value factor or future value interest factor for single cash flow at I7D over ) com ounding eriod ,&am le1 #alculate CV of 955E at end of .5 !ears if annual com ound rate * B3 955 (. + 65B) .5 * =8A6=AA 4resent Value #alculation 4V * CV7(. + I7D)) I7D * rate of return er com ounding eriod and ) * number of com ounding eiod .7(. + I7D)) * resent value factor> resent value interest factor> discount factor for single cash flow at I7D over ) com ounding eriod ,&am le 1 given discount rate of .53 calculate 4V of .555 that will received in five !ears

Annuity
-n annuit! is stream of equal cash flows that occurs at equal interval over a given eriod "rdinar! annuities cash flow occur at end of each com ounding eriod -nnuities due a!ment occur at beginning of com ounding eriod

Present Value of Annuity Due

4V-" * Measure of collective 4V of cash flows received at end of each com ounding eriod over a stated number of eriod

Future Value of Annuity Due

CV-D * Measure of collective CV of cash flows received at begining of each com ounding eriod over a stated number of eriod CV-D * CV-" (. + I7D) 4V-D * 4V-" (. + I7D)

,&am le1 Fhat is future value of an ordinar! annuit! that a!s .:5E er !ear at end of each of ne&t .: !ears> given the investment is e& ected to ear A3 rate of return

Present Value of Perpetuity

4er etuit! is a financial instrument that a!s a fi&ed amount of mone! at set interval over infinite eriod of time6 (ritish consul bond and most referred stocks are e&am le of er etuities6 4V er etuit! * 4MT 7 (I7D)

PV and FV for un even cash flows

<se #C (cash flow) and )4V ke!s G#CH G2nd H G#IR F"RJH #lear #C memor! register 5 G,)T,RH Down arrow and start filling value

Solvin TMV proble!s when co!poundin fre"uency is other than annual

Increasing com ounding frequenc! increase CV and decrease 4V CV * 4V (. + i7n)n! CV * 4V(e! .) ,-R * (. + i7n)n! ,-R * e! .

LOS 5.e ! (ra' time line and solve )#* applications savings or mortgages and saving for college tuition and retirements
#oan pay!ents and a!orti$ation
Ioan amortiKation is rocess of a!ing off a loan with series f eriodic loan a!ments> where b! a ortion of outstanding loan is aid off or amortiKed with each a!ment6 /eries of equal a!ments 4a!ment remain fi&ed ,ach a!ment include re a!ment of interest and rinci al Interest and rinci al com onent change with time

A!orti$ation Schedule
#aclulate 4MT Cind beginning balance #alculate interest com onent #alculate rinci al com onent from 4MT #alculate ending balance Re eat above

For!ulas
"uture #alue and $resent #alue of single Sum

+nnuity

$erpetuity

,nterest

,-R * (. + i7n)n!