principal/PV 10000 lump sum

rate of interest 9% m
time 5
FV 15386.239549 m
semi annually $15,529.69 m
quartely 15605 m
monthly 15656.81 m
daily 15682.25 m
continous compounding 15683.1218549017 PV*(e)^i*n
FV PV*(1+i)^n
$2.00
direct formula
$1.00 $15,386.24
$2.00 $15,529.69
$4.00
$12.00
$365.00
even cash flows
present value
uneven cash flows multiperiod investment and future
lumpsum one time investment value

FV PV*(1+i)^n LUMPSUM INTEREST ARE ANNUAL

PV*(1+i/2)^n*2 INTREST ARE SEMI-ANNUAL
PV*(1+i/4)^n*4 QUARTELY
MONTHLY
PV*(1+i/365)^n*365 DAILY
PV*(e)^i*n continous compounding
exponential=2.71

FV PV*(1+i)^n (1+i)^n compunding factor

PV FV/(1+i)^n 1/(1+i)^n discounting factor

FV PV*(1+i)^n
(FV/PV)^1/n 1+i
i ((FV/PV)^1/n)-1
i 6.27%
m=1
m=2
m=4
m=12
m=365
m is the number of
compounding period
even cash flows
un even cash flows
end of the period
time compounding period rate
1 4 10%
2 3 10%
3 2 10%
4 1 10%
5 0 10%

future value 11545.1

time
time compouding rate
1 3 8%
2 2 8%
3 1 8%
4 0 8%

annuity (fx)

FV

ANNUITY

time compouding rate

1 3 8%
2 2 8%
3 1 8%
4 0 8%

6.12

Jakob Kovács plans to save €5 000 every year for the next eight years, starting today. At the end of
eight years, Jakob will turn 30 years old and plans to use his savings toward the down payment on a
house. If his investment in a mutual fund will earn him 10.3 per cent annually, how much will he have
saved in eight years when he will need the money to buy a house?

future value ?
beginning of the year even cash flows

time (beginning) compuding factor rate

1 8 10.30%
2 7 10.30%
3 6 10.30%
4 5 10.30%
5 4 10.30%
6 3 10.30%
7 2 10.30%
8 1 10.30%

 (1  i ) n  1
FVAn  PMT    (1  i )
 i 
 (1.103) 8  1
 €5 000    (1.103)  €5 000  11.5612  1.103
 0 . 103 
 €63 760.19
 annuity
single period investment will be considered for each cashflows

cash flows Future value

1000 1464.1
1000 1331
5000 6050
1000 1100
1600 1600

4 end of the period beginning

even cash flows (annuity): mutual fund SIP/RD future value at the end of four years future value at the end of fou
13000 16376.256
13000 15163.2
13000 14040
13000 13000
total 58579.456

($58,579.46) lumpsum and even cash flows

(PV/i)*(1-(1/(1+i)^n)*(1+i)^n

UNeven cash flows Future

-13000 $16,376.26
-12000 $13,996.80
-11000 $11,880.00
-11000 $11,000.00
$53,253.06

000 every year for the next eight years, starting today. At the end of
years old and plans to use his savings toward the down payment on a
utual fund will earn him 10.3 per cent annually, how much will he have
years when he will need the money to buy a house?

annuity due

present value future value (end of the period)

5000 10954.0344859135
 5000 9931.12827372033
5000 9003.74276855877
5000 8162.95808572871
5000 7400.687294405
5000 6709.598635
5000 6083.045
5000 5515
total 63760.1945433264

) n  1
 (1  i )
i 
103) 8  1
 (1.103)  €5 000  11.5612  1.103
0.103 
e value at the end of four years
future value of annuity cash stream  (1  i ) n  1
FVAn  PMT   
 i 

future value of annuity due cash stream  (1  i ) n  1

FVAn  PMT    (1  i )
 i 

PRESENT value of annuity cash stream  1 

1  (1  i ) n 
PVAn  PMT   
 i 

 


 1 
1  (1  i ) n 
PRESENT value of annuity due cash stream PVAn  PMT    (1  i )
 i 
 

perpetuitites of a constant stream PMT/i

 1
 (1  i )



) 
n
 (1  i )


 Kevin Winthrop is saving for an Australian vacation in three years. He estimates that he w
fund that is expected to earn an average return of 10.3 per ce

annuity
even cash flow stream
at the end period
FV
PMT
RATE
TIME

Jakob Kovács plans to save €5 000 every year for the next eight years, starting today. At the end of eight years, Jako
hav
 Perpetuity: Calculate the present value of the following perpetuities:

b.
c.

Stavanger Oil Services has borrowed a huge sum from the Norwegian Finance Compan
payment of NKr 1 540 862.19 each year beginning today. What is the amoun

Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan

Future Value (December)

present value (Janurary)

Stavanger Oil Services has borrowed a huge sum from the Norwegian Finance Compan
payment of NKr 1 540 862.19 each year beginning today. What is the amoun

 1 
 1  
(1  i ) n
PVAn  PMT    (1  i )
 i 
 

PMT
i
n
PVA
ree years. He estimates that he will need €5 000 to cover his airfare and all other expenses for a week-long h
an average return of 10.3 per cent over the next three years, how much will he have to save every year if he

5000
?
10.30%
3
5000
0 YEAR 1 YEAR 2YEAR 3YEAR
pmt? PMT? PMT?

ting today. At the end of eight years, Jakob will turn 30 years old and plans to use his savings toward the down payment on a house. If his i
have saved in eight years when he will need the money to buy a house?

Future value ?
annuity due
 (1  i ) n  1 
FVAn  PMT   
 i 
PMT 5000
rate 10.30% FVA 63760.19
n 8
 Perpetuity: Calculate the present value of the following perpetuiti
a. €1 250 discounted back to the present at 7%
b. €7 250 discounted back to the present at 6.33%
c. €850 discounted back to the present at 20%

a. €1 250 discounted back to the present at 7%

€7 250 discounted back to the present at 6.33%
€850 discounted back to the present at 20%

17857.1428571429

114533.965244866

4250

the Norwegian Finance Company at a rate of 17.5 per cent for a seven-year period. The loan calls for a
inning today. What is the amount borrowed by this company? Round to the nearest kroner.

time FV discounting period n-1

1 1 540 862.19 0
2 1 540 862.19 1
3 1 540 862.19 2
4 1 540 862.19 3
5 1 540 862.19 4
6 1 540 862.19 5
 7 1 540 862.19 6
8 1 540 862.19 7
present value (t=0)

Annuity (december) Annuity Due (janurary)

n n+1
n n-1

the Norwegian Finance Company at a rate of 17.5 per cent for a seven-year period. The loan calls for a
inning today. What is the amount borrowed by this company? Round to the nearest kroner.

1540862.19
17.50%
7
7000000
es for a week-long holiday in Australia. If he can invest his money in an equity index
ave every year if he starts saving at the end of this year?
 (1  i ) n  1
FVAn  PMT   
 i 

382.7785

yment on a house. If his investment in a mutual fund will earn him 10.3 per cent annually, how much will he

 (1  i ) n  1 
PMT    (1  i )
 i 
 the following perpetuities:
he present at 7%
e present at 6.33%
e present at 20%

oan calls for a

er.
oan calls for a
er.
Babu Baradwaj is saving for his son’s university tuition. His son is currently 11 years old and will begin university in seven yea
that is earning 9.5 per cent annually. Total expenses at the university where his son says he plans to go currently total €15 000
cent each year. Babu plans to invest in a mutual fund that will earn 11 per cent annually to make up the difference between t
total, Babu will make seven equal investments with the first starting today and with the last being made a yea

a. What will be the present value of the fours years of university expenses just when the son starts
b. What will be the value of the index mutual fund when his son just starts university?
c. What is the amount that Babu will have to have saved when his son turns 18 if Babu plans to c
d. How much will Babu have to invest every year in order for him to have enough funds to cover
t=1 15000
four year tution fees 7 to 10 years

Q1 At CF FV
7 15000*(1+6%)^7 22554.4538849
8 15000*(1+6%)^8 23907.721118
9 15000*(1+6%)^9 25342.184385
10 15000*(1+6%)^10 26862.7154481

Q2 FV PV*(1+i)^n
14156.6370476163

Q3 target saving needed

71967.7262026608

Q4 FV 71967.7262026608
rate 11%
PMT ?
annuity due
n 7
10.8594342701597

PMT 6627.20768064489
will begin university in seven years. Babu has an index fund investment worth €7500
ans to go currently total €15 000 per year, but are expected to grow at roughly 6 per
make up the difference between the university expenses and his current savings. In
nd with the last being made a year before his son begins university.

penses just when the son starts at university? Assume a discount rate of 5.5 percent.
st starts university?
son turns 18 if Babu plans to cover all of his son’s university expenses?
o have enough funds to cover all his son’s expenses?
rate 6%

discounting factor 6%
discounting factor present value at 7th year beginning
1 21378.6292747587
2 21479.9497926485
3 21581.7505025663
4 21684.0336803036
total cost 86124.3632502771

 (1  i ) n  1
FVAn  PMT    (1  i )
 i 
 6.1 end of the period
2020
2021
you are
standing at Jan 2022
2020 2023
present value

PV

6.2

Your grandfather has agreed to deposit a certain amount of

money each year into an account paying 7.25 per cent annually to
help you go to university. Starting next year, he plans to deposit
€2 250, €8 150, €7 675, €6 125, and €12 345 in to the account.
How much will you have at the end of the five years?
where are you standing
FV5  €2 250 (1.0725 ) 4  €8 150 (1.0725 ) 3  €7 675(1.0725 ) 2  €6 125(1.0
 €12 345
 €2 976 .95  €10 054 .25  €8 828 .22  €6 569 .06  €12 345 .00
 €40 773.48

Carol Jenkins, a lottery winner, will receive the following

payments over the next seven years. If she can invest her cash
flows in a fund that will earn 10.5 percent annually, what is the
present value (today) of her winnings?

€200 000 €250 000 €275 000 €300 000 €350 000 €400 000
€550 000

discounting period
1
2
3
4
5
6
7
 future value discounting rate
13000 1 8%
11500 2 8%
12750 3 8%
9635 4 8%
? Total

FV/(1+i)^n

at the end of five years FV?

2 2
(1.0725 )  €6 125(1.0725 )

9 .06  €12 345 .00

rate Future value (end of the period) present value

10.50% 200000.00 180995.47511312
10.50% 250000.00 204746.01257141
10.50% 275000.00 203819.56002583
10.50% 300000.00 201220.46238667
10.50% 350000.00 212449.96028759
10.50% 400000.00 219728.46571438
10.50% 550000.00 273417.77407898
total 1496377.710178
present value
12037.037037
9859.39643347
10121.361073
7082.01263169
39099.807175
longer the duration lower will be the present value
higher the discount rate lower will be the present value
 Arianna De Luca deposits €1 200 in her bank today. If the bank pays 4 per cent simple interest, how much mone
end of five years? What if the bank pays compound interest? How much of the earnings will be interes
i 4% n 5
simple interest 48 $240.00
after 5 years 1200 $1,440.00
compound interest 1459.983
interest on interest $19.98
mple interest, how much money will she have at the
of the earnings will be interest on interest?