Professional Documents
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Chapter 2
Time Value of Money
Future value
Present value
Rates of return
Amortization
2-2
0 1 2 3
i%
0 1 2 Year
i%
100
2-4
0 1 2 3
i%
0 1 2 3
i%
-50 100 75 50
2-6
0 1 2 3
10%
100 FV = ?
After 1 year:
FV1 = PV + INT1 = PV + PV (i)
= PV(1 + i)
= $100(1.10)
= $110.00.
After 2 years:
FV2 = FV1(1+i) = PV(1 + i)(1+i)
= PV(1+i)2
= $100(1.10)2
= $121.00.
2-8
After 3 years:
FV3 = FV2(1+i)=PV(1 + i)2(1+i)
= PV(1+i)3
= $100(1.10)3
= $133.10.
In general,
HP10BII (Continued)
To permantly show all digits, hit
ORANGE shift, then DISP, then .
(period key)
Set decimal mode: Hit ORANGE shift,
then ./, key. Note: many non-US
countries reverse the US use of
decimals and commas when writing a
number.
2-12
INPUTS 3 10 -100 0
N I/YR PV PMT FV
OUTPUT 133.10
Spreadsheet Solution
Use the FV function: see spreadsheet
in Ch 02 Mini Case.xls.
= FV(Rate, Nper, Pmt, PV)
= FV(0.10, 3, 0, -100) = 133.10
2-16
0 1 2 3
10%
PV = ? 100
2-17
3
1
PV = $100
1.10
= $100 0.7513 = $75.13.
2-18
INPUTS 3 10 0 100
N I/YR PV PMT FV
OUTPUT -75.13
Spreadsheet Solution
Use the PV function: see spreadsheet.
= PV(Rate, Nper, Pmt, FV)
= PV(0.10, 3, 0, 100) = -75.13
2-20
-1 2
FV = PV(1 + i)n
$2 = $1(1 + 0.20)n
(1.2)n = $2/$1 = 2
nLN(1.2) = LN(2)
n = LN(2)/LN(1.2)
n = 0.693/0.182 = 3.8.
2-21
Financial Calculator
INPUTS 20 -1 0 2
N I/YR PV PMT FV
OUTPUT 3.8
2-22
Spreadsheet Solution
Use the NPER function: see
spreadsheet.
= NPER(Rate, Pmt, PV, FV)
= NPER(0.10, 0, -1, 2) = 3.8
2-23
-1 2
FV = PV(1 + i)n
$2 = $1(1 + i)3
(2)(1/3) = (1 + i)
1.2599 = (1 + i)
i = 0.2599 = 25.99%.
2-24
Financial Calculator
INPUTS 3 -1 0 2
N I/YR PV PMT FV
OUTPUT 25.99
2-25
Spreadsheet Solution
Use the RATE function:
= RATE(Nper, Pmt, PV, FV)
= RATE(3, 0, -1, 2) = 0.2599
2-26
Ordinary Annuity
0 1 2 3
i%
0 1 2 3
10%
FV Annuity Formula
The future value of an annuity with n
periods and an interest rate of i can
be found with the following formula:
(1 i) 1
n
PMT
i
(1 0.10) 1
3
100 331.
0.10
2-29
INPUTS 3 10 0 -100
N I/YR PV PMT FV
OUTPUT 331.00
Spreadsheet Solution
Use the FV function: see spreadsheet.
= FV(Rate, Nper, Pmt, Pv)
= FV(0.10, 3, -100, 0) = 331.00
2-32
0 1 2 3
10%
PV Annuity Formula
The present value of an annuity with n
periods and an interest rate of i can
be found with the following formula:
1
1-
(1 i) n
PMT
i
1
1-
(1 0.10) 3
100 248.69
0.10
2-34
Spreadsheet Solution
Use the PV function: see spreadsheet.
= PV(Rate, Nper, Pmt, Fv)
= PV(0.10, 3, 100, 0) = -248.69
2-36
0 1 2 3
10%
INPUTS 3 10 100 0
N I/YR PV PMT FV
OUTPUT -273.55
0 1 2 3 4
10%
Spreadsheet Solution
A B C D E
1 0 1 2 3 4
2 100 300 300 -50
3 530.09
Excel Formula in cell A3:
=NPV(10%,B2:E2)
2-45
= (1 + 0.12) - 1.0
2
= (1.06)2 - 1.0
= 0.1236 = 12.36%.
2-53
EARAnnual = 12%.
Amortization
0 1 2 3
10%
INPUTS 3 10 -1000 0
N I/YR PV PMT FV
OUTPUT 402.11
2-61
302.11
Principal Payments
0 1 2 3
Level payments. Interest declines because
outstanding balance declines. Lender earns
10% on loan outstanding, which is falling.
2-65
-100 FV=?
FV273 = $1001.00031054
273
= $1001.08846 = $108.85.
iPer = iNom/m
= 11.33463/365
= 0.031054% per day.
0 1 2 3 4 5 6 6-mos.
5% periods
0 1 2 3 4 5 6
5%
EAR = ( 0.10
1+ 2 ) - 1 = 10.25%.
2-73
0 1 2 3
5%
90.70
82.27
74.62
247.59
2-75
-850 1,000
3 Ways to Solve:
FVBank = $850(1.00018538)456
= $924.97 in bank.
PV = $1,000/(1.00018538)456
= $918.95.
2-80
6.76649/365 =
INPUTS 456 .018538 0 1000
N I/YR PV PMT FV
OUTPUT -918.95
3. Rate of Return
Convert % to decimal:
Decimal = 0.035646/100 = 0.00035646.
P/YR = 365
NOM% = 0.035646(365) = 13.01
EFF% = 13.89