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Finance
Week 4 Time Value of Money 2
Learning Objectives
At the end of this chapter, you should be
able to:
Discuss the role of time value in finance and the
use of various calculation techniques
Understand the concept of future value and
present value and the components involved in
the calculations
Understand ordinary annuity and an annuity
due, in both present value and future value
calculations, as well as the concept of perpetuity
Example
Jay wishes to find the effective annual rate
associated with an 8% nominal annual rate (r =
0.08) when interest is compounded (1)
annually (m = 1); (2) semiannually (m = 2);
and (3) quarterly (m = 4).
Ordinary Vs Due
Lets say that you are saving up for retirement
and decide to deposit RM3,000 each year for
the next 20 years into an account which pays a
rate of interest of 8% per year. By how much
will your accumulated nest egg vary if you
make each of the 20 deposits at the beginning
of the year, starting right away, rather than at
the end of each of the next twenty years?
Under which of the three options will Rose pay the least
interest and why? Calculate the total amount of the
payments and the amount of interest paid under each
alternative.
Method 1
Method 2
Method 3
Total Payment
Interest Paid
Discount
64,420.40
24,420.40
Interest only
60,000.00
20,000.00
Amortized
52,759.31
12,759.31
Amortisation Schedules
Tabular listing of the allocation of each loan
payment towards interest and principal
reduction. Helps borrowers and lenders figure
out the payoff balance on an outstanding loan.
Procedure:
Compute the amount of each equal periodic
payment (PMT).
Calculate interest on unpaid balance at the end of
each period, minus it from the PMT, reduce the loan
balance by the remaining amount,
Continue the process for each payment period, until
we get a zero loan balance.
Amortisation Schedules
Year
1
2
3
4
5
Beg. Bal
Payment
Interest
Principal
Reduced
Ending
Balance