Académique Documents
Professionnel Documents
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=
k
k
PMT PV
n
[ 5-5]
CHAPTER 5 Time Value of Money 5 - 51
Ordinary Annuity
Involve end-of-period payments First cash flow occurs at n=1
An annuity is a finite series of equal and periodic cash flows
where PMT
1
=PMT
2
=PMT
3
==PMT
n
Time = n
PMT
n
Time = 0
Time of Investment
n=0
Time = 1
PMT
1
Time = 2
PMT
2
Time = 3
PMT
3
CHAPTER 5 Time Value of Money 5 - 52
Future Value of An Ordinary Annuity
An example of a compound annuity would be where
you save an equal sum of money in each period
over a period of time to accumulate a future sum.
CHAPTER 5 Time Value of Money 5 - 53
Annuities and Perpetuities
Ordinary Annuities
Compound Value Annuity Formula (CVAF)
1 1
PMT(CVAF)
k
k) (
PMT FV
n
n
=
+
=
[ 5-4]
CHAPTER 5 Time Value of Money 5 - 54
Future Value of An Annuity
Example:
How much will you have at the end of three years if you save
$1,000 each year for three years at a rate of 10%?
FV
3
= $1,000 {[(1.1)
3
- 1].1} =$1,000 3.31 = $3,310
1 1
k
k) (
PMT FV
n
n
+
=
CHAPTER 5 Time Value of Money 5 - 55
Future Value of An Annuity
Example:
How much will you have at the end of three years if you save
$1,000 each year for three years at a rate of 10%?
FV
3
= $1,000 {[(1.1)
3
- 1] / .1} =$1,000 3.31 = $3,310
What does the formula assume?
$1,000
1
(1.1) (1.1) = $1,210
+ $1,000
2
(1.1) = $1,100
+ $1,000
3
= $1,000
Sum = = $3,310
CHAPTER 5 Time Value of Money 5 - 56
Future Value of An Annuity
Assumptions
FVA
3
= $1,000 {[(1.1)
3
- 1].1} =$1,000 3.31 = $3,310
What does the formula assume?
$1,000
1
(1.1) (1.1) = $1,210
+ $1,000
2
(1.1) = $1,100
+ $1,000
3
= $1,000
Sum = = $3,310
The CVAF assumes that time zero (t=0) (today) you decide to invest, but
you dont make the first investment until one year from today. The Future
Value you forecast is the value of the entire fund (a series of investments
together with the accumulated interest) at the end of some year n = 1 or n
= 2 in this case n = 3. NOTE: the rate of interest is assumed to remain
unchanged throughout the forecast period.
If these
assumptions
dont
holdyou cant
use the
formula.
CHAPTER 5 Time Value of Money 5 - 57
Adjusting your solution to the
circumstances of the problem
The time value of money formula can be applied to any
situationwhat you need to do is to understand the
assumptions underlying the formulathen adjust your
approach to match the problem you are trying to solve.
In the foregoing problemt isnt too logical to start a savings
programand then not make the first investment until one
year later!!!
CHAPTER 5 Time Value of Money 5 - 58
Example of Adjustment
(An Annuity Due)
You plan to invest $1,000 today, $1,000 one year
from today and $1,000 two years from today.
What sum of money will you accumulate at time 3 if
your money is assumed to earn 10%.
This is known as an annuity due rather than a regular annuity.
CHAPTER 5 Time Value of Money 5 - 59
Annuity Due
First cash flow occurs at n=0
An annuity due is a finite series of equal and periodic cash
flows where PMT
1
=PMT
2
=PMT
3
==PMT
n
but the first payment
occurs at time=0.
Time = n
PMT
n
Time = 0 Time = 1
PMT
1
Time = 2
PMT
2
Time = 3
PMT
3
No PMT
CHAPTER 5 Time Value of Money 5 - 60
Example of Adjustment
An Annuity Due
You plan to invest $1,000 today, $1,000 one year from today and $1,000 two
years from today.
What sum of money will you accumulate in three years if your money is
assumed to earn 10%.
You should know that there is a simple way of adjusting a normal annuity
to become an annuity duejust multiply the normal annuity result by (1+k)
and you will convert to an annuity due!
FV
3
(Annuity due)= $1,000 {[(1.1)3 - 1].1} (1+ k)
=$1,000 3.31 1.1
= $3,310 1.1 = $3,641
$1,000
1
(1.1) (1.1) (1.1) = $1,331
+ $1,000
2
(1.1) (1.1) = $1,210
+ $1,000
3
(1.1) = $1,100
Sum = = $3,641
CHAPTER 5 Time Value of Money 5 - 61
Annuities and Perpetuities
Future Value of an Annuity Due Formula
) 1
1 1
k (
k
k) (
PMT FV
n
n
+
(
+
=
[ 5-6]
CHAPTER 5 Time Value of Money 5 - 62
Annuities and Perpetuities
Present Value of an Annuity Due
k) (1
) 1 (
1
1
0
+
(
(
(
(
=
k
k
PMT PV
n
[ 5-7]
Discounting Cash Flows
Time Value of Money
CHAPTER 5 Time Value of Money 5 - 64
What is Discounting?
Discounting is the inverse of compounding.
n
n k
n k
k CVIF
PVIF
) 1 (
1 1
,
,
+
= =
CHAPTER 5 Time Value of Money 5 - 65
Example of Discounting
You will receive $10,000 one year from today. If you had the
money today, you could earn 8% on it.
What is the present value of $10,000 received one year from now
at 8%?
PV
0
=FV
1
PVIF
k,n
= $10,000 (1/ 1.08
1
)
PV
0
= $10,000 0.9259 = $9,259.26
NOTICE: A present value is always less than the absolute value of the
cash flow unless there is no time value of money. If there is no rate of
interest then PV = FV
CHAPTER 5 Time Value of Money 5 - 66
PVIF
k,n
(For a single cash flow)
Tables of present value interest factors can be created:
Period 1% 2% 3% 4% 5% 6% 7%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083
n
n k
k
PVIF
) 1 (
1
,
+
=
CHAPTER 5 Time Value of Money 5 - 67
PVIF
k,n
(For a single cash flow)
Notice the farther away the receipt of the cash flow from todaythe lower the
present value
Notice the higher the rate of interestthe lower the present value.
Period 1% 2% 3% 4% 5% 6% 7%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083
5083 . 0
) 07 . 1 (
1
10
10 %, 7
=
+
=
= = n k
PVIF
CHAPTER 5 Time Value of Money 5 - 68
PVIF
k,n
(For a single cash flow)
If someone offers to pay you a sum 50 or 60 years hencethat promise is
pretty-much worthless!!!
n
n k
k
PVIF
) 1 (
1
,
+
=
Period 5% 10% 15% 20% 25% 30% 35%
60 0.0535 0.0033 0.0002 0.0000 0.0000 0.0000 0.0000
70 0.0329 0.0013 0.0001 0.0000 0.0000 0.0000 0.0000
80 0.0202 0.0005 0.0000 0.0000 0.0000 0.0000 0.0000
90 0.0124 0.0002 0.0000 0.0000 0.0000 0.0000 0.0000
100 0.0076 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000
110 0.0047 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
The present value of $10 million promised 100 years from
today at a 10% discount rate is = $10,000,000 * 0.0001 = $1,000!!!!
The Reinvestment Rate
Time Value of Money Concepts
CHAPTER 5 Time Value of Money 5 - 70
The Nature of Compound Interest
When we assume compound interest, we are implicitly assuming
that any credited interest is reinvested in the next period, hence, the
growth of the fund is a function of interest on the principal, and a
growing interest upon interest stream.
This principal is demonstrated when we invest $10,000 at 8% per
annum over a period of say 4 yearsthe future value of this
investment can be decomposed as follows...
CHAPTER 5 Time Value of Money 5 - 71
FV
4
of $10,000 @ 8%
Rate of Interest = 8.00%
Time
Principal at
Beginning
of the Year Interest
End of Period
Value of the
Fund (Principal
plus Interest)
1 $10,000.00 $800.00 $10,800.00
2 $10,800.00 $864.00 $11,664.00
3 $11,664.00 $933.12 $12,597.12
4 $12,597.12 $1,007.77 $13,604.89
Of course we can find the
answer using the
formula:
FV
4
=$10,000(1+.08)
4
=$10,000(1.36048896)
=$13,604.89
CHAPTER 5 Time Value of Money 5 - 72
Annuity Assumptions
When using the unadjusted formula or table values
for annuities (whether future value or present value)
we always assume:
the focal point is time 0
the first cash flow occurs at time 1
intermediate cash flows are reinvested at the rate of interest for
the remaining time period
the interest rate is unchanging over the period of the analysis.
CHAPTER 5 Time Value of Money 5 - 73
FV of an Annuity Demonstrated
When determining the Future Value of an Annuitywe
assume we are standing at time zero, the first cash flow
will occur at the end of the year and we are trying to
determine the accumulated future value of a series of five
equal and periodic payments as demonstrated in the
following time line...
0 1 2 3 4 5
$2,000 $2,000 $2,000 $2,000 $2,000
CHAPTER 5 Time Value of Money 5 - 74
FV of an Annuity Demonstrated
We could be trying find out how much we would
accumulate in a savings fundif we saved $2,000 per year
for five years at 8%but we wont make the first deposit
in the fund for one year...
0 1 2 3 4 5
$2,000 $2,000 $2,000 $2,000 $2,000
CHAPTER 5 Time Value of Money 5 - 75
FV of an Annuity Demonstrated
The time value of money formula assumes that each
payment will be invested at the going rate of interest for the
remaining time to maturity.
This final $2,000 is
contributed to the
fund, but is assumed
not to earn any
interest.
$2,000 invested at 8% for 4 years
$2,000 invested at 8%
for 3 years
$2,000 invested at
8% for 2 years
$2,000 invested at 8% for 1 year
0 1 2 3 4 5
$2,000 $2,000 $2,000 $2,000 $2,000
CHAPTER 5 Time Value of Money 5 - 76
FV of an Annuity Demonstrated
Annuity Assumptions: A demonstration
- focal point is time zero
- the first cash flow occurs at time one
Future value of a $2,000 annuity at the end of five years at 8%:
Time Cashflow CVIF Future Value
0
1 $2,000 1.3605 $2,720.98
2 $2,000 1.2597 $2,519.42
3 $2,000 1.1664 $2,332.80
4 $2,000 1.0800 $2,160.00
5 $2,000 1.0000 $2,000.00
Future Value of Annuity = FV(5) $11,733.20
CVIF for 4 years at 8% (4
years is the remaining
time to maturity.)
Notice that the final
cashflow is just
received, it doesn't
receive any interest.
CHAPTER 5 Time Value of Money 5 - 77
FV of an Annuity Demonstrated
Annuity Assumptions: A demonstration
- focal point is time zero
- the first cash flow occurs at time one
You can always discount or compound the individual cash flowshowever it may be quicker to use an annuity formula.
Future value of a $2,000 annuity at the end of five years at 8%:
Time Cashflow CVIF Future Value
0
1 $2,000 1.3605 $2,720.98
2 $2,000 1.2597 $2,519.42
3 $2,000 1.1664 $2,332.80
4 $2,000 1.0800 $2,160.00
5 $2,000 1.0000 $2,000.00
Future Value of Annuity = FV(5) $11,733.20
Using the formula: FV(5) = PMT(CVAF t=5, r=8%) = $2,000 [(((1 + r)t)-1) / r] = $2,000(5.8666) = $11,733.20
CVIF for 4 years at 8% (4
years is the remaining
time to maturity.)
Notice that the final
cashflow is just
received, it doesn't
receive any interest.
CHAPTER 5 Time Value of Money 5 - 78
FV of an Annuity Demonstrated
In summary the assumptions are:
focal point is time zero
we assume the cash flows occur at the end of every
year
we assume the interest rate does not change during
the forecast period
the interest received is reinvested at that same rate of
interest for the remaining time until maturity.
CHAPTER 5 Time Value of Money 5 - 79
PV of an Annuity Demonstrated
Annuity Assumptions: A demonstration
- focal point is time zero
- the first cash flow occurs at time one
You can always discount or compound the individual cash flowshowever it may be quicker to use an annuity formula.
Present value of a five year $2,000 annual annuity at 8%:
Time Cashflow PVIF Present Value
0
1 $2,000 0.9259 $1,851.85
2 $2,000 0.8573 $1,714.68
3 $2,000 0.7938 $1,587.66
4 $2,000 0.7350 $1,470.06
5 $2,000 0.6806 $1,361.17
Present Value of Annuity = $7,985.42
Using the formula: PV = PMT(PVIFA n=5, k=85) = $2,000 [1- 1/(1 + k)n] / k = $2,000(3.9927) = $7,985.40
PVIF for 1 year at 8%
CHAPTER 5 Time Value of Money 5 - 80
The Reinvestment Rate Assumption
It is crucial to understand the reinvestment rate assumption that is
built-in to the time value of money.
Obviously, when we forecast, we must make
assumptionshowever, if that assumption not realisticit is
important that we take it into account.
This reinvestment rate assumption in particular, is important in the
yield-to-maturity calculations in bondsand in the Internal Rate of
Return (IRR) calculation in capital budgeting.
Perpetuities
Time Value of Money Concepts
CHAPTER 5 Time Value of Money 5 - 82
Perpetuities
Perpetuities
A perpetuity is an infinite annuity
An infinite series of payments where each payment
is equal and periodic.
Examples of perpetuities in financial markets
includes:
Common stock (with a no growth in dividend
assumption)
Preferred stock
Consol bonds (bonds with no maturity date)
CHAPTER 5 Time Value of Money 5 - 83
Perpetuity
Involve end-of-period payments First cash flow occurs at n=1
A perpetuity is an infinite series of equal and periodic cash
flows where PMT
1
=PMT
2
=PMT
3
==PMT
Time =
PMT
Time = 0
Time of Investment
n=0
Time = 1
PMT
1
Time = 2
PMT
2
Time = 3
PMT
3
CHAPTER 5 Time Value of Money 5 - 84
Perpetuities
Perpetuity Formula
0
k
PMT
PV =
[ 5-8]
Where:
PV
0
= Present value of the perpetuity
PMT = the periodic cash flow
k = the discount rate
CHAPTER 5 Time Value of Money 5 - 85
Perpetuity: An Example
While acting as executor for a distant relative, you
discover a $1,000 Consol Bond issued by Great Britain
in 1814, issued to help fund the Napoleonic War. If the
bond pays annual interest of 3.0% and other long U.K.
Government bonds are currently paying 5%, what would
each $1,000 Consol Bond sell for in the market?
CHAPTER 5 Time Value of Money 5 - 86
Perpetuity: Solution
( )
0
$1, 000 0.03
0.05
$30
0.05
$600
PMT
PV
k
=
=
=
=
Nominal Versus Effective Rates
Time Value of Money Concepts
CHAPTER 5 Time Value of Money 5 - 88
Nominal Versus Effective Interest Rates
So far, we have assumed annual compounding
When rates are compounded annually, the quoted
rate and the effective rate are equal
As the number of compounding periods per year
increases, the effective rate will become larger than
the quoted rate
CHAPTER 5 Time Value of Money 5 - 89
Nominal versus Effective Rates
General Formula for Effective Annual Rate
1 ) 1 ( + =
m
m
QR
k
[ 5-9]
CHAPTER 5 Time Value of Money 5 - 90
Calculating the Effective Rate
1 1
m
Effective
QR
k
m
| |
= +
|
\ .
Where:
k
Effective
= Effective annual interest rate
QR = the quoted interest rate
M = the number of compounding periods per year
CHAPTER 5 Time Value of Money 5 - 91
Example: Effective Rate Calculation
A bank is offering loans at 6%, compounded monthly. What is
the effective annual interest rate on their loans?
12
1 1
.06
1 1
12
6.17%
m
Effective
QR
k
m
| |
= +
|
\ .
| |
= +
|
\ .
=
CHAPTER 5 Time Value of Money 5 - 92
Nominal versus Effective Rates
Continuous Compounding Formula
1 =
QR
e k
[ 5-10]
CHAPTER 5 Time Value of Money 5 - 93
Continuous Compounding
When compounding occurs continuously, we
calculate the effective annual rate using e, the base
of the natural logarithms (approximately 2.7183)
1
QR
Effective
k e =
CHAPTER 5 Time Value of Money 5 - 94
10% Compounded At Various Frequencies
Compounding
Frequency
Effective Annual
Interest Rate
2 10.25%
4 10.3813%
12 10.4713%
52 10.5065%
365 10.5156%
Continuous 10.5171%
CHAPTER 5 Time Value of Money 5 - 95
Calculating the Quoted Rate
If we know the effective annual interest rate, (k
Eff
) and we
know the number of compounding periods, (m) we can
solve for the Quoted Rate, as follows:
( )
1
1 1
m
Eff
QR k m
(
= +
(
CHAPTER 5 Time Value of Money 5 - 96
When Payment & Compounding Periods Differ
When the number of payments per year is different
from the number of compounding periods per year,
you must calculate the interest rate per payment
period, using the following formula
1 1
m
f
Per
Period
QR
k
m
| |
= +
|
\ .
Where:
f = the payment frequency per year
CHAPTER 5 Time Value of Money 5 - 97
Nominal versus Effective Rates
Formula for Effective Rates for Any Period
1 1 - )
m
QR
( k
f
m
+ =
[ 5-11]
Loans and Loan Amortization Tables
Time Value of Money Concepts
CHAPTER 5 Time Value of Money 5 - 99
Loan Amortization
A blended payment loan is repaid in equal periodic
payments
However, the amount of principal and interest varies
each period
Assume that we want to calculate an amortization
table showing the amount of principal and interest
paid each period for a $5,000 loan at 10% repaid in
three equal annual instalments.
CHAPTER 5 Time Value of Money 5 - 100
Blended Interest and Principal Loan
Payments - formula
(
(
(
(
=
=
k
k) (1
1
1
PMT Principal
) PMT(PVAF Principal
n
n k,
Where:
Pmt = the fixed periodic payment
t= the amortization period of the loan
r = the rate of interest on the loan
CHAPTER 5 Time Value of Money 5 - 101
Blended Interest and Principal Loan
Payments - example
52 . 018 , 1 $
818147 . 9
000 , 10 $
Pmt
.08
) 08 . 1 (
1
1
Pmt 000 , 10 $
r
) 1 (
1
1
PMT Principal
20
= =
(
(
(
(
=
(
(
(
(
=
n
k
Where:
Pmt = unknown
t= 20 years
r = 8%
Calculator Approach:
10,000 PV
0 FV
20 N
8 I/Y
CPT PMT $1,018.52
CHAPTER 5 Time Value of Money 5 - 102
How are Loan Amortization Tables Used?
To separate the loan repayments into their constituent components.
Each level payment is made of interest plus a repayment of
some portion of the principal outstanding on the loan.
This is important to do when the loan has been taken out for the
purposes of earning taxable incomeas a result, the interest is a
tax-deductible expense.
CHAPTER 5 Time Value of Money 5 - 103
Loan Amortization Tables
Using an Excel Spreadsheet
Principal = $100,000
Rate = 8.0%
Term = 5
PVAF = 3.99271
Payment = $25,045.65
Retired Ending
Year Principal Interest Payment Principal Balance
1 100,000.00 8,000.00 25,045.65 17,045.65 82,954.35
2 82,954.35 6,636.35 25,045.65 18,409.30 64,545.06
3 64,545.06 5,163.60 25,045.65 19,882.04 44,663.02
4 44,663.02 3,573.04 25,045.65 21,472.60 23,190.41
5 23,190.41 1,855.23 25,045.65 23,190.41 0.00
CHAPTER 5 Time Value of Money 5 - 104
Loan or Mortgage Arrangements
Effective Rate for Any Period Formula
1 1 - )
m
QR
( k
f
m
Eff
+ =
[ 5-11]
CHAPTER 5 Time Value of Money 5 - 105
Loan Amortization
Example with Solution
First calculate the annual payments
( )
( )
( )
3
1 1
1 1
5, 000
1 1.10
0.10
$2, 010.57
n
Annuity
Annuity
n
k
PV PMT
k
PV
PMT
k
k
| |
+
= |
|
\ .
=
| |
+
|
|
\ .
=
| |
|
|
\ .
=
Calculator Approach:
5,000 PV
0 FV
3 N
10 I/Y
CPT PMT $2,010.57
CHAPTER 5 Time Value of Money 5 - 106
Amortization Table
Period Principal:
Start of
Period
Payment Interest Principal Principal:
End of
Period
1
5,000.00 2,010.57 500.00 1,510.57 3,489.43
2
3,489.43 2,010.57 348.94 1,661.63 1,827.80
3
1,827.80 2,010.57 182.78 1,827.78 0
CHAPTER 5 Time Value of Money 5 - 107
Calculating the Balance O/S
At any point in time, the balance outstanding on the
loan (the principal not yet repaid) is the PV of the
loan payments not yet made.
For example, using the previous example, we can
calculate the balance outstanding at the end of the
first year, as shown on the next page
CHAPTER 5 Time Value of Money 5 - 108
Calculating the Balance O/S after the 1
st
Year
( )
( )
1
2
1 1
1 1.10
2, 010.57
.10
$3, 489.42
n
t
k
PV PMT
k
(
+
= (
(
(
= (
(
=
CHAPTER 5 Time Value of Money 5 - 109
Canadian Residential Mortgages
A Canadian residential mortgage is a loan with one
special feature
By law, banks in Canada can only compound the
interest twice per year on a conventional mortgage,
but payments are typically made at least monthly
To solve for the payment, you must first calculate
the correct periodic interest rate
CHAPTER 5 Time Value of Money 5 - 110
Canadian Residential Mortgages
For example, suppose we want to calculate the monthly
payment on a $100,000 mortgage amortized over 25 years
with a 6% annual interest rate.
First, calculate the monthly interest rate:
2
12
1 1
.06
1 1
2
.004938622 0.4938622%
m
f
Per
Period
QR
k
m
or
| |
= +
|
\ .
| |
= +
|
\ .
=
CHAPTER 5 Time Value of Money 5 - 111
Calculating the Monthly Payment
Now, calculate the monthly payment on the mortgage
( )
( )
( )
0
0
300
1 1
1 1
100, 000
1 1.004938622
.004938622
$639.81
n
t
t
n
k
PV PMT
k
PV
PMT
k
k
=
=
(
+
= (
(
=
(
+
(
(
=
(
(
(
=
Calculator Approach:
100,000 PV
0 FV
300 N
.4938622 I/Y
CPT PMT $639.81
CHAPTER 5 Time Value of Money 5 - 112
Monthly Mortgage Loan Amortization
Table
Principal = $100,000
Quoted rate = 6.0%
Effective annual Rate = 6.090% (Assuming semi-annual compounding)
Effective monthly Rate = 0.49386%
Term = 25 years
Term in months = 300
PVAF = 156.297225
Payment = $639.81
Retired Ending
Month Principal Interest Payment Principal Balance
1 100,000.00 493.86 639.81 145.94 99,854.06
2 99,854.06 493.14 639.81 146.67 99,707.39
3 99,707.39 492.42 639.81 147.39 99,560.00
4 99,560.00 491.69 639.81 148.12 99,411.88
5 99,411.88 490.96 639.81 148.85 99,263.03
CHAPTER 5 Time Value of Money 5 - 113
Summary and Conclusions
In this chapter you have learned:
To compare cash flows that occur at different points in time
To determine economically equivalent future values from values
that occur in previous periods through compounding.
To determine economically equivalent present values from cash
flows that occur in the future through discounting
To find present value and future values of annuities, and
To determine effective annual rates of return from quoted
interest rates.
Concept Review Questions
Time Value of Money
CHAPTER 5 Time Value of Money 5 - 115
Concept Review Question 1
Quoted versus Effective Rates
Why can effective rates often be very different from
quoted rates?
The more frequently interest is compounded the higher the effective
rate of return.
Because financial institutions are legally only required to quote APR
(Annual Percentage Rates) that are stated (nominal) the published
rate is often much lower than the actual rate charged depending on
the frequency of compounding.
This is why reading the fine print is so important!
CHAPTER 5 Time Value of Money 5 - 116
Internet Links
Planning tools and online courses through TD Canada Trust
Online tools and calculators through RBC Royal Bank
CHAPTER 5 Time Value of Money 5 - 117
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