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    Capital Markets

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    Yshi Kim

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    Capital Markets

    Uploaded by

    Yshi Kim
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    © © All Rights Reserved

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    5 views17 pages

    Capital Markets

    Uploaded by

    Yshi Kim

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 17

    capital market

    lesson 2

    Presented by:
    Caberos, Marlyn M.
    Guerrero, Gillie
    lesson 2
    Mathematics of Finance

    • The Importance of the Time Value of Money


    • Determining the Future Value
    • Determining the Present Value
    • Determining the Number of Compounding
    Periods
    time value of money
    - is defined as a concept that states that purchasing
    power of money differs with the passage of time.

    REASON 1.
    t
    REASONS FOR
    Cash flows occurring
    CONCEPT at different points in time
    have different values relative to any one point in
    time.
    time value of money
    - is defined as a concept that states that purchasing
    power of money differs with the passage of time.

    REASON 2.
    t
    REASONS FOR
    CONCEPT
    Cash flows are uncertain. Expected cash flows may not
    materialize. Uncertainty stems from the nature of
    forecasts of the timing and/or the amount of cash flows.
    IMPORTANCE OF THE TIME VALUE OF MONEY

    • TVM and Compounding


    - TVM helps calculating the PV interest earned on investment as well as on interest
    itself too.
    • Financial Management and TVM
    - One should compare PV of benefits with the opportunity cost for decision making.
    • Capital Budgeting and TVM
    - While deciding for which investment to opt, one should consider the PV of cash flow.
    • Personal Finance Decisions TVM
    - TVM is an important concept to be considered before buying an insurance, renting
    property, or buying one in future.
    • Investing and TVM
    - TVM helps in considering inflation, risk and investment opportunity before investing.
    DETERMINANTS OF TIME VALUE
    OF MONEY

    OPPORTUNITY
    COST

    The dollar cost of each purchase is the actual


    amount of money spent, but when you spend
    money, you also lose other things.
    DETERMINANTS OF TIME VALUE
    OF MONEY

    2 interest Compensation
    INTEREST RATE

    Interest rate work as a • It consists of compensation for the


    way to calculate the time length of time the money is
    value of money because borrowed.
    they are determined by the • Compensation for the risk that the
    market as a whole. A rise amount borrowed will not be
    or fall in interest affects repaid exactly as set forth in the
    TVM. loan agreement.
    determining the future value and
    present value
    - Determining the future value (FV) and present value (PV) of an investment involves
    calculations based on certain parameters like the initial investment amount, interest rate,
    time period, and compounding frequency.
    • Future or ( Maturity) Value
    -It can be defined as the rising value of today’s sum at a specified future date given at a
    specified interest rate. The formula to calculate the future value of an investment is:
    n
    FV=PV(1+r)
    Where:
    • FV = Future Value
    • PV = Present Value (initial investment)
    • r = Interest Rate per period (expressed as a decimal)
    • n = Number of periods
    Principal at the
    1,000.00
    beginning
    Interest for one year (1000*0.10) 100
    First Year :
    Principal at the end 1,100.00

    Principal at the
    1,100.00
    beginning
    Second Year: Interest for the year (1100*0.10) 110

    Principal at the end 1,210.00


    Principal at the
    1,210.00
    beginning

    Third Year: Interest for the year (1210*0.10) 121

    Principal at the end 1,331.00


    Future Value Calculation Example:
    • Let's say Mr. A invests $1,000 for say 3 years and 10% interest rate
    compounding annually.

    FV= PV(1+r) n
    3
    FV= 1000 (1+0.10)
    3
    FV = 1000 (1.10)
    FV=1000 × 1.331
    FV =1331

    So, the future value of the investment after 3 years would be approximately
    1331.
    2. PRESENT (principal) VALUE
    - It can be defined as today’s value of a single payment or series of
    payments to be received at a later date, given at a specified discount rate.
    The process of determining the present value of a future payment or a series
    of payments or receipts is known as discounting.
    The formula to calculate the present value of an investment is:
    PV = FV / (1+r) n
    Where:
    • FV = Future Value
    • PV = Present Value (initial investment)
    • r = Interest Rate per period (expressed as a decimal)
    • n = Number of periods
    Present Value Calculation Example:
    • Mr. A has an offer to get $1331 after 3 years if he pays $975 today. A
    market interest rate is 10% with annual compounding. To decide whether
    he should pay $975 or not, he should be able to compare his proposed
    outflow of today with today’s value of $1331 to be received after 3 years.
    We know that the present value of $1331 after 3 years is $1000. So, Mr.
    A should definitely pay $975 because there is a clear-cut benefit of $25
    over and above the interest earnings.

    n
    PV = FV / (1+r)
    3
    PV = 1331 / (1+0.10)
    3
    PV = 1331 / (1.10)
    PV= 1331 / 1.331
    PV= 1000
    determining the number of compounding periods

    - Determining the number of compounding periods involves figuring out how many times interest is
    compounded over a given period. The number of compounding periods depends on the interest rate, the
    frequency of compounding, and the duration of the investment or loan.
    Step 1: Identify the PV, FV, and the nominal interest rate (both I/Y and C/Y).
    Step 2: Solve for the periodic interest rate (i) using the formula :
    i = I/Y over C/Y
    Step 3: Use the formula for the future value, rearrange, and solve for n.
    FV= PV(1+r) n
    Step 4: Convert n to years and months.
    YEARS = n over C/Y
    • FV= Future value or maturity value C/Y = Compounds per year
    • PV= Present value or principal value ln = Natural logarithm
    • i = Periodic interest rate
    • I/Y = Nominal interest rate per year
    • n = Total number of compounding periods
    Compounding Period Calculation Example:
    • Jenny Holdings invested $43,000 at 6.65% compounded quarterly. A report from
    the finance department shows the investment is currently valued at $67,113.46.
    How long has the money been invested?
    Step 1: Given variables:
    PV = $43,000; I/Y = 6.65%; C/Y = quarterly = 4;
    FV = $67,113.46

    Step 2: Solve for the periodic interest rate, i.


    i = I/Y
    C/Y
    = 6.65%
    4
    = 1.6625%
    Step 3: Use the formula for the future value, rearrange, and solve for n.
    n
    FV = PV(1+i)
    n
    67,113.46 = 43,000(1 + 0.016625)
    n
    1.560778 = 1.016625
    n
    ln(1.560778) = ln(1.016625) (by taking ln of both sides)
    n
    ln(1.560778) = n ln(1.016625) (by using the property ln (x) = n ln(x))
    n = ln(1.560778)
    ln(1.016625)
    n = 0.445184
    0.016488
    n = 27 quarterly compounds
    Step 4: Convert n to years and months.
    Years = n
    C/Y
    = 27
    4
    = 6.75 years
    = 6 years and .75 X 12 = 9 months

    N I/Y P/V F/V P/Y C/Y

    Answer:
    6.65 -43,000 67,113.46 4 4
    26.999996
    Thank
    You

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