Principles of Banking and Finance

Principles of Banking and Finance star Cashflow 1. Present cling to (PV) * the value on a given understand of a payment or serial of payments made at otherwise times (past or future) * Discounting from the future * think of at t=0 on a given time line (t is the stay, ranging from 0 to n where n being the last period). * Net Present Value (NPV) PV after deducting completely the costs 2. Future Value (FV) * The amount to which a specific sum and /or series of payments will grow on a given date in the future * Compounding (interests upon interests) Value at t0 on a given time line star Cashflow Formulas FV = PV(1 + i)t PV = FV / (1+i)t i = (FV / PV)1/t 1 good Interest Rate * Effective (Annual) Interest Rate (EIR) * The interest rate expressed as if it were compound once a year. * Used to compare two alternative investments with different compounding periods * Does not include any fees incurred as part of the loan package * Nominal or Quoted Annual Interest Rate (NIR) * (pe riodic rate) x (number of periods per year) The rate normally quoted in the loan agreement * All-in Rate * NIR that includes all the fees incurred as part of the loan package Formulas Uneven Cashflow Even Cashflow * annuity series of equal payments (PMT) that occur at regular intervals for a period of time (t). * Payment is normally made at the bar of the period. For payment occurs at the beginning of the period, it is Annuity Due. Perpetuity infinite series of equal payments Formula Annuities Formula Perpetuities When n ? , PV (Perpetuity) = PMT/i