Principles of Banking and Finance

Principles of Banking and Finance Single Cashflow 1. Present rank (PV) * the value on a given examine of a payment or series of payments do at other times (past or future) * Discounting from the future * Value at t=0 on a given time demarcation line (t is the period, ranging from 0 to n where n being the polish period). * Net Present Value (NPV) PV after deducting all 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 Single Cashflow Formulas FV = PV(1 + i)t PV = FV / (1+i)t i = (FV / PV)1/t 1 Effective Interest estimate * Effective (Annual) Interest Rate (EIR) * The interest rate expressed as if it were compounded once a year. * Used to compare both alternative investments with different compounding periods * Does not include any fees incurred as part of the lend software system * Nominal or Quoted Annual Interest Rat e (NIR) * (periodic 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). * salary is normally made at the end of the period. For payment occurs at the beginning of the period, it is Annuity Due. Perpetuity quad series of equal payments Formula Annuities Formula Perpetuities When n ? , PV (Perpetuity) = PMT/i