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TIME VALUE OF MONEY APPLICATION - Coggle Diagram
TIME VALUE OF MONEY APPLICATION
TYPES OF INTEREST RATES
PERIODIC RATE
amount of interest charged eachh period
=iNOM/ m (m: number of compounding periods per year)
EFFECTIVE ANNUAL RATE (EAR)
The annual rate of interest actually being earned
EAR% = (1 + iNOM / m )^m - 1
NOMINAL RATE (iNOM)
an annual rate that ignores compounding effects
quoted or state rate
ANNUAL PERCENTAGE RATE (APR)
APR = iPER * N (N: the number of times a bank pays interest per year)
SINGLE CASH FLOW
Only one cash flow at the end of period
Present value PV = CFt/ (1+i)^t
Future value FV = CFt / (1+i)^t
MULTIPLE CASH FLOW
UNEVEN CASH FOLWS
amount varies from one period to the next
EVEN CASH FLOWS
amount does not vary from one period to the next or follow pattern
PERPETUITY
PV = CF/r
Growing of perpetuity PV= CF1/(r-g)
ANNUITY:
equal cash flow at fixed intervals for sepecified number of periods
Payment (PMT) is equal cash flow
2 types
ORDINARY ANNUITY
payments are made at the end of each period
Step 1: Draw timeline
Step 2: Compare cash flows: finding PV and FV
PV Ao = PMT/i
[1-1/(1+i)^n]
FV Ao = PMT/i
[(1+i)^n - 1]
LOAN AMORTIZATION
S2: Find the interest paid in year 1: INTt = BEGINNING BALANCEt * i
S3: FInd the principal repaid in year 1 : PRIN = PMT - INT
S1: Find the required annual payment PV Ao = PMT/i * [1-1/(1+i)^n]
S4: Find the ending balance after year 1 : ENDING BAL = BEG BAL - PRIN
ANNUITY DUE
payments are made at the beginning of each period
FV due = FV ordinary * (1+i)
PVdue = PV ordinary * (i+i)