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Chapter 5

FIN3403 Chapter Notes - Chapter 5: Amortization Schedule

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Financial Management Time Value of Money Chapter 5
Time Lines
o Time line helps you visualize what’s happening in a particular problem
FV = PV(1+I)N
Future Values
o The process of going to Future Value from Present Value is called compounding
Different Methods to find FV
o Step by Step Approach
Find each periods value manually
o Formula Approach
Listed above
o Financial Calculators
o Spreadsheets
Graphic View of the Compounding Process
o Time Value concept can be applied to anything that grows
Sales, population, earnings per share, etc
Present Value
o Discounting is finding present values
o PV = FVN/(1+I)N
o Opportunity costs the rate of return you could earn on an alternative investment of a
similar risk
Graphic View of the Discounting Process
o The present value of a sum to be received in the future decreases and approaches zero
as the payment date is extended further into the future
o The present value falls faster at higher interest rates
Finding the interest Rate, I
o You can’t factor out I algebraically
o Inputs N, PV, PMT (0), and FV
o Outputs I/YR
Finding the Number of Years, N
o Inputs I/YR, PV (Negative), PMT (0), and FV
o Annuity a series of equal payments at fixed intervals for a specified number of periods
Ex. Student loans, auto loans, mortgage loans
o Ordinary Annuity (Deferred annuity) - payments occur at the end of each year or pay
Most common in finance
o Annuity Due payments are made at the beginning of the year
Future Value of an Ordinary Annuity
o FVAN = PMT ([(1+I)N-1]/I)
o Inputs N, I/YR, PV (0), PMT (Negative)
o Output FV
Future Value of an Annuity Due
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