FInancial math

© All Rights Reserved

Просмотров: 25

FInancial math

© All Rights Reserved

- ACI Dealing Certificate
- Tolentino Pre Boards
- Notes Receivable
- Market Study Financial Appraisal
- HBS Case Study 1 - TV Money
- fin622 quiz1st
- L16_ECE4001_Spring_2011
- Amortization (3)
- SGD-FM)(1)
- MPWMD Monterey Peninsula Water Supply Project Evaluation of Financing Alternatives 09-17-12
- Time Value
- Introduction to Engg Economics
- ch4_3
- Time Value of Money
- Chapter 1- Time Value of Money
- 6. Chapter Opener
- pp
- Tutorial Solutions Week 9
- Accounts and Finance
- time value

Вы находитесь на странице: 1из 39

2

Financial Mathematics

There is an underlying assumption to all

finance theory and financial mathematics that

a dollar today is worth more than a dollar next

year

would you prefer $1000 today

or $1000 in one years time?

What do we mean by

time value of money?

3

A simple Example

of a Future Value

If I invest $100 in a bank today for a period of

one year and the interest rate quoted by the

bank is 10%pa.

How much will I expect to have in the bank

next year?

Interest= $100 times 10% (or.10) = 10

add original investment to the interest

= $110

This simple calculation is the basis for all

financial maths calculations.

4

Introduction

To solve financial mathematics problems we

need to understand terms used.

PV = principal or present value

i = interest rate -sometimes r or k

n = term of loan or investment-

sometimes t used

FV = future value of investment

PMT = periodic payment or cash flow,

sometimes CF

t

5

Time Line Concept

start of period 2

start of period 1

end of period 1

end of period 2

___________ __________ ___________

0 1 2 3

Normally drawn as-

Interest for the period of time

6

Example 1 - Future Value

Assume an investor has an account with a

bank that pays interest once per year.

The investor deposits $1,000 now and

intends to allow the account to accumulate

over the next three years.

How much will the investor have accumulated

in three years time when the interest rate,

over the three year period, is 12%pa.

There are a number of ways of calculating

this amount. We will look at three.

7

Calculation 1 Future value

YEAR OPENING INTEREST NEW

BALANCE FOR YEAR BALANCE

1 1000.00 120.00 1120.00

2 1120.00 134.40 1254.40

3 1254.40 150.53 1404.93

Calculation of interest = Opening balance times

interest rate

ie 1,000 times 12% = 120.00

8

Calculating Future Value

Using Financial Maths Formula

FV=PV (1 +i)*(1 +i)*(1 +i)*.......* (1 +i)

can be simplified to:

FV = PV ( 1 + i )

n

where

i = the per period interest rate.

n= the number of compounding periods

PV = the original principal or starting value.

9

Example 2 - Future Value

Fred wants to invest $4,000 for four years.

The bank will compound Fred's deposit at

15% per year.

What is the value of Fred's deposit in four

years time?

SOLUTION

!_____!______!______!______!

0 1 2 3 4

10

Workshop Exercises 1

What is the interest earned from an

investment of $100,000 that pays simple

interest of 7% and the investment is for one

year.

Solution

What would be the future value at the end of

one year

Solution

11

Present Value - Example 3

The present value is found by a simple

rearrangement of the formula

PV = FV / ( 1 + i )

n

OR PV = FV ( 1 + i )

-n

You have inherited a bank account that

guarantees to pay you $30,000 in five years

time.

How much funds could you obtain for it now,

if a financier was prepared to discount the

$30,000 back to today's value, at a rate of

20% pa.

12

A more Practical Question

You want to retire in 20 years time

You estimate you will need $2,500,000 to

keep you in a life style that you are used to.

A super fund promises to earn you 9%pa

How much would you need to invest today

13

Example 4

What is the per compounding period

rate for a 18% nominal annual interest

rate, compounding quarterly.

14

Example 5

XZY Company has an investment that is

earning 14% p.a. compounding quarterly.

The investment was deposited two years ago

and will mature in five years time from now.

What is the value XZY will receive in five

years time?

The amount of the deposit was $20,000

15

Example 6

Your uncle has a superannuation policy

that promises to pay him $1,250,000 on

his 60th birthday.

He is currently 35 and the fund currently

earns 12%pa, compounded monthly.

What is the value of this policy in

today's dollars? (ie. its present value)

16

Annuities

An annuity is a series of equal cash flows

accruing at equal time intervals, for a

specified period of time.

The timing of the cash flow is crucial.

Note formula: (Ordinary Annuity)

assumes all cash flows occur at the end of

each period.

___ ___ ___ ___ __

0 1 2 3 4 5

Note: cash flow occurs at end of the period.

17

Annuities continued

FV = PMT + PMT ( 1 + i )

1

+ PMT ( 1 + i )

2

+

PMT ( 1 + i )

3

+ .... + PMT ( 1 + i )

n

Future Value Formula

FV = PMT[{(1+i)

n

-1} / i]

or shortened to FV = PMT S

n/i

n represents the number of periods or payments

and i represents the per period interest rate

18

Example 7

June has put aside $500 each year for

seven years at an interest rate of 8%

nominal annual interest

rate,compounded annually.

What amount will June be able to

spend in seven years time? (assume

the first deposit was made at the end of

the first year)

19

Example 8

You need to put funds aside to cover an

expense of $7,500.

This expense will occur in 5 years time.

If the rate is 8%pa. compounded quarterly.

How much should you put aside each quarter

to meet the expense of $7,500?

(assume the first deposit was made at the

end of the first quarter)

20

Retirement Example Step 2

You want to retire in 20 years time

You estimate you will need $2,500,000 to

keep you in a life style that you are used to.

A super fund promises to earn you 9%pa

How much would you need to pay into the

fund each year to reach your goal.

First payment made at the end of the year

21

Workshop Exercises 3

Mr & Mrs Olympic plan to travel overseas in four

years time

They were told that the air tickets and

accommodation would cost them $15,000

If they plan to deposit into a bank account $900 per

quarter for four years, starting at the end of the first

quarter, will they have sufficient funds to pay for the

trip?

Will they have any money left over?

The bank pays interest at a rate of 8% p.a.

compounded quarterly.

22

Annuities continued

Present Value Formula

PV = PMT(1 - (1 + i)

-n

) / i

or PV = PMT A

n/i

Just the same as the future value

Please note when present valuing cash

flows, the present value is at the

beginning of the period not the end.

23

Example 9

What is the present value of a series of

payments of $100 received each quarter for 9

years if the interest rate is 8%pa.

compounded quarterly?

24

Example 10

If you require $50,000 to buy a house.

The bank will lend the funds to you for 15

years at 12%pa. compounded quarterly.

What are the repayments?

25

Workshop Exercises 2

Harry Cola has bought into a cola bar

business.

He is required to pay $800 per month

for 3 years.

If the cost of funds is 12% compounded

monthly, what is the cost in today's

dollars of Harry's investment?

26

Workshop Exercises 4

I Lucky has won a $30 million lottery.

The lottery promises to pay I Lucky, $4 million

now and then $2 million each year for the

next 13 years.

If I Lucky thinks that money is worth 10% pa.

What is the real value of this lottery win?

ie todays valve

27

Question

The present value of a future amount;

a) decreases as the interest rate increases.

b) increases as the number of discount

periods increase.

c) increases as the interest rate increases.

d) none of the above.

28

Question

An annuity is;

a) any series of payments or receipts.

b) any series of equal payments or receipts

received at regular intervals for a set

period of time

c) any series of payments or receipts which

earn interest.

d)none of the above.

29

Perpetuities

Is an annuity that lasts forever.

It is infinite, Never ends

present value of an annuity formula is

PV = PMT(1 - (1+i)

-n

) / i

As n gets large; (1 + i)

-n

approaches zero

therefore PV of a perpetuity is

PV = PMT / i

Can be no future value as it is infinite

has all the same features as an annuity,

There can be no FV

30

Example 12

What funds would have to be invested today

to create a scholarship for students.

The scholarship is to pay $5,000 each year.

Assume the funds earning rate is 7% pa.

The first payment is to be made at the end of

the year

31

Question

A perpetuity provides a specific cash

payment for how many years;

a) ten years.

b) 100 years.

c) infinite number of years.

d) none of the above.

32

Workshop Exercises 5

A Builder is to construct a power station on

land owned by the government.

The government has agreed to grant a lease

over the land in perpetuity.

The government has valued the land at $34

million.

What will be the annual lease payments if the

government has a cost of funds of 12%pa.

33

Workshop Exercises 6

A forest company is offering investors an

opportunity to invest in a rubber plantation.

The cost is $4,000 now and $2,000 in another

years time.

The projected returns from this investment is

$1,000 in year three, $1,500 in year four,

$2,000 the next year and for the years after

that $2,500 to be received each year in

perpetuity.

34

Workshop Exercises 6 continued

The risk of this investment is considered

to be 15% pa.

Is it worth investing in this project?

35

Workshop Exercises 7

Friends, a partnership is looking at an

investment.

It will cost Friends $120,000 at the beginning

of 2000 (assume this is today) to buy into this

investment, one year later Friends will be

paid/receive $2,000, the following year they

receive $3,000 and then from year three on,

they will receive $7,000 a year forever.

Friends want to receive 12% pa. on their

investment, what is the present value to

Friends of all the cash flows at the start of the

investment?

36

Workshop Exercises 8

Bert and Beryl have decided to establish a

trust fund that will pay their two

grandchildren, Peter and Mary, $20,000 each

on their 21st birthdays.

Beryl & Bert want to deposit into the trust fund

an equal amount of money each half year

over the next ten years, starting with a

deposit today, the 1st of June 1998 and then

each six months on the 1st of December and

1st June for the next ten years.

37

Workshop Exercises 8 continued

The last deposit will be made on the 1st June

2008. They plan to make a total of 21

deposits taking into account the very first

deposit used to open the fund.

The fund will make the first payment to Mary

on the 1st June 2010. Peter gets paid on the

1st December 2012.

If the trust fund earns 8% pa. compounded

half yearly.

38

Workshop Exercises 8 continued

What is the total amount of the fund Beryl and

Bert need to accumulate in order to have

sufficient funds on hand at the 1st June 2008,

to pay Peter and Mary.

What is the amount of the 21 equal deposits

that Beryl and Bert must deposit into the fund

to be able to pay their two grandchildren the

$20,000?

39

Workshop Exercises 9

You want to have accumulated $25,000 in 9

years time.

An investment savings account offers to pay

you 4%pa. For the first four years and then

move to 6% for the final five years.

If you want to deposit equal amounts into this

investment account starting today and then

making another 9 deposits

What is the amount of each of the 10

deposits?

- ACI Dealing CertificateЗагружено:David Hort
- Tolentino Pre BoardsЗагружено:JelsCaldoAlvarez
- Notes ReceivableЗагружено:Trang Le
- Market Study Financial AppraisalЗагружено:Amir Si
- HBS Case Study 1 - TV MoneyЗагружено:latiful188
- fin622 quiz1stЗагружено:Kamran Haider
- L16_ECE4001_Spring_2011Загружено:cicici1234
- Amortization (3)Загружено:Jay Luciano
- SGD-FM)(1)Загружено:Bikash Dubey
- MPWMD Monterey Peninsula Water Supply Project Evaluation of Financing Alternatives 09-17-12Загружено:L. A. Paterson
- Time ValueЗагружено:sweetgirl198701
- Introduction to Engg EconomicsЗагружено:shagulhameedl
- ch4_3Загружено:kevinpura
- Time Value of MoneyЗагружено:Swati Svelte
- Chapter 1- Time Value of MoneyЗагружено:Ayush Jaggi
- 6. Chapter OpenerЗагружено:ShaoPuYu
- ppЗагружено:shazarafia
- Tutorial Solutions Week 9Загружено:Bob
- Accounts and FinanceЗагружено:shivam
- time valueЗагружено:Caesar Sanchez
- MATH554-B01 Summer2014 T1 SolutionsЗагружено:Crimson Red
- Dec 2012 (T3) Mathematics and StatisticsЗагружено:Davies Mumba
- Week 4.pptxЗагружено:Zhaslan Hamzin
- Assignment 1 FinЗагружено:ritesh
- Chapter 6- Time Value MoneyЗагружено:mih
- FM2Загружено:Daniel Chan Ka Lok
- Excel 2010 Fórmulas_Parte63Загружено:xdpablo328
- 2 Compound Interest FormulasЗагружено:Riswan Riswan
- Falin-Math_of_Finance_and_Investment_3.pdfЗагружено:Alfred alegado
- Finance Assign 2bЗагружено:Muthiah Khairani

- [Group5]HW2Загружено:Karthik Krishnan
- manju1.docxЗагружено:Anonymous ty7mAZ
- Income TaxationЗагружено:benjamintee
- Business Plan Dress ShopЗагружено:roneldayo62
- Review Questions Minus AnswersЗагружено:Tushar Ballabh
- Book CoreConcernsinIndianDefenceЗагружено:Down syndrome
- 2009-May04-No368-ca-theedgesporeЗагружено:The Edge Singapore
- SQC14Загружено:scr
- The Banks Rating Analysis the Differences Between the Regional Development Banks and Non Foreign Exchange Commercial Banks in IndonesiaЗагружено:IJSTR Research Publication
- Attachment 2 3Загружено:Mi Zan
- Gitanjali Case StudyЗагружено:Riddhi Shah
- 97-155-1-PB_2.pdfЗагружено:Kumar Naveen
- Direct Deposit FormЗагружено:Louis Bach
- Operations Research - Definition Meaning Features LimitationsЗагружено:Abhinav Aggarwal
- US Ukraine Software Development Cooperation ForumЗагружено:QATestlab
- Agreement-20160716152404Загружено:hateduk
- OCBC Preference Shares Brochure 2008Загружено:Nickayy
- Australian Valuation Handbook 2436862Загружено:jfpansard7730
- Cme e Mini Stock Index Futures and Options Product OverviewЗагружено:maxmuxer
- Fin 401 Crib SampleЗагружено:leesheng1
- ACCA F7 Combined Technical Articles D16Загружено:Ivan Ivanov
- Executive Summary MSCI ESG Ratings MethodologyЗагружено:Gertrude Rosen
- Quiz 4 - Risk and ReturnЗагружено:Jaze Ticzon
- Mgmt 026 Chapter 04 Hw Part 2Загружено:Bánh Bao
- xmlp1867937tmp_000245983366_3848 (1)Загружено:reenasree
- Irrevocable Letter of GuaranteeЗагружено:api-3708362
- Problem Sets Finacc Chapter 9.pptxЗагружено:Regrine Lagarteja
- Quiz InventoriesЗагружено:Kimboy Elizalde Panaguiton
- RR 3-98 (FBT)Загружено:jamesleeM
- Chapter 1Загружено:lishpa123