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Lecture 2: TVM and Loan Amortisation - Coggle Diagram
Lecture 2: TVM and Loan Amortisation
Time Value of Money
Idea that money available today is worth more than the same amount in the future because you can invest the money
Compounding
FVn = PV(1+I) ^n
Discounting
PV = FVn / (1 + I) ^n
Annuity: Series of equal cash flows at fixed intervals for a specific no. of periods.
Ordinary Annuity: Cash flows occur at the end of period.
Solving for FV
Solving for PV
Annuity Due: Cash flows occur at the beginning of period.
Solving for FV
FVAdue = FVAord (1+I)
Solving for PV
PVAdue = PVAord(1 + I)
Perpetuity: Annuity that lasts forever
PV = PMT/I
Classification of Interest Rates
Nominal Rate (Inom)
AKA quoted or stated rate. An annual rate that ignores compounding effects.
Periodic Rates (Iper)
Amount of interest charged each period, e.g. monthly or quarterly.
Iper = Inom / M
Effective (or equivalent) annual rate (EAR = EFF%)
The annual rate of interest actually being earned, accounting for compounding.
EFF% = (1 + Inom / M) ^M -1
Loan Amortisation
Amortised Loan: A loan that is repaid in equal payments over its life.
Constructing Amortisation Table