01/08/2019 Compounding Future value = Present value + expected value add (over multiple periods) Future value = Present value + compounding rate (per period) * Present value Future value = Present value (1+ compounding rate) 7 PVo = Present Value CF, = Cash Flow at time m Multi-period cash flows with compounding resent Value of all cash flows CF, = Cash Flow at time i r= Discount rate01/08/2019 ‘APR = Annual Percentage rate (p.c.) Rates and compounding periodicity EAR = Effective annual rate (o.0.) m = No. of discounting periods per year The compounding (discounting) rate is usually given as the Annual Percentage rate (APR). APR is directly used if the compounding frequency is once a year (m =1) For cases where cash flow is on an annual basis and where (m > 1), we calculate the EAR and use it solve the problem. For cases where cash flow occur on a periodicity of less than a year, we use “as the holding period rate, with no. of compounding periods = (no. of years * m) + For cases where cash flow occur on a periodicity of more than a year, we use (1+APR)" -1 as the holding period rate, with no. of compounding periods = (no. of years / m) The main types of cash flows (multi-period with compounding) crite" oF | ‘Above formulas for growing perpetuity. Unless stated otherwise, g= 0. Such problems would be of 4 unknown and other 2 given variables. Important assumptions: + The PVs as on the current moment (start of year 1, =0), + The cash flows start from end of year 1. + The cash flows continue at regular periodicity. sree01/08/2019 The main types of cash flows (multi-period with compounding) Perpetuity = CEC + By ° 1 Ra Above formula is for growing perpetuity Unless stated ‘otherwise, = 0, Such problems would be of 1 unknown and other 2 given variables, Important assumptions: + The PV is as on the current moment (start of year 1, t=0) + The cash flovis start from end of year 1 + The cash flows continue at regular periodicity tre Annuity fo [Above formula i for annuity. Any problem would be of 1 unknown and other 3 gen variables. Important assumptions: «+ The PVis.as on the current moment, (start of year 1, t=0}. + The cash flows start from end of year 1. + The cash flows continue at regular periodicity Perpetuity01/08/2019 Perpetuity (Q.1a) * Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. Given that the APR is 5% p.a., calculate the current value of the endowment. F G Perpetuity (Q.1a) ° ds ease + Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. Given that the APR is 5% p.a., calculate the current value of the endowment. Sol Hs eZ ‘Question type: APR and PVo = 10000/0.05 = 200,000 constant perpetual cash flow provided Calculate the PV01/08/2019 Perpetuity (Q.1b) + Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. Given that the APR is 5% p.a. compounded quarterly, calculate the current value of the endowment. Perpetuity (Q.1b) + land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. Given that the APR is 5% p.a. compounded quarterly, calculate the current value of the endowment. Sol: = y-1 ‘Question type: APR with intra- EAR = (1+0.05/4)*-1 = 5.095% feast tbran constant perpetual cashflow PV» = 10000/0.05095 = 196,270 provided, Calculate the PV01/08/2019 Perpetuity (Q.1c) + land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. Given that the EAR is 5.1% p.a. with quarterly compounding, calculate the current value of the endowment. F CF Perpetuity (Q.1c) Pvo= = I | a 1 Man + Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. Given that the EAR is 5.1% p.a. with quarterly compounding, calculate the current value of the endowment. Sol: ‘Question ype: EARand constant perpetual cashflow PVp = 10000/0.051 = 196,078 provided. Calculate the PV01/08/2019 Perpetuity (Q.2) * land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. in real terms (adjusted for inflation). Given that the risk free rate is 5% p.a. and the inflation rate is 3% p.a., calculate the current value of the endowment. Perpetuity (Q.2) Ca if a o 4 * land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. in real terms (adjusted for inflation). Given that the risk free rate is 5% p.a. and the inflation rate is 3% p.a., calculate the current value of the endowment. Sol: ‘Question type: APR and rowing perpetual cash flow PV, = 10000/(5%-3%) = 500,000 provided. Calculate the PV01/08/2019 Perpetuity (Q.3a) + Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. starting now. Given that the APR is 5% p.a., calculate the current value of the endowment. Perpetuity (Q.3a) + Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. starting now. Given that the APR is 5% p.a., calculate the current value of the endowment. Sol: PVo = 10000+ 10000/0.05 = 10,000 ‘Question type: APRand constant perpetual cash flow starting a time t=0 provided. Calculate the PV01/08/2019 Perpetuity (Q.3b) + Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. in real terms (adjusted for inflation) , starting now. Given that the risk free rate is 5% p.a. and the inflation rate is 3% p.a., calculate the current value of the endowment. cE +g)" Perpetuity (Q.3b) 1 ent + Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. in real terms (adjusted for inflation), starting now. Given that the risk free rate is 5% p.a. and the inflation rate is 3% p.a., calculate the current value of the endowment. Question type: APR and {growing perpetual cash flow starting at time t=0 provided Calculate the Pv. 0000+ 10000(1+0.03)/(5%-3%) = 525,00001/08/2019 Perpetuity (Q.4) * land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. in real terms (adjusted for inflation). Given that the risk free rate is 3% p.a. and the inflation rate is 5% p.a., calculate the current value of the endowment. cea + a 1+) Perpetuity (Q.4) er no + Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. in real terms (adjusted for inflation). Given that the risk free rate is 3% p.a. and the inflation rate is 5% p.a., calculate the current value of the endowment. Sol: ‘Question type: APR and rowing perpetual cashflow Not solvable ede cette 1001/08/2019 Perpetuity (Q.5) + Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 p.a. every second year. Given that the APR is 5% p.2., calculate the current value of the endowment. Perpetuity (Q.5) * Land my heirs, are beneficiary of an endowment created by my mother. The endowment pays a perpetuity of Rs. 10,000 every second year. Given that the APR is 5% p.a., calculate the current value of the endowment. Sol: PVo = 10000/{(1+0.05)?-1} = 97,561 Question type: APRand constant perpetual cash flow provided. Calculate the holding period return and the PV 1101/08/2019 Annuity Annuity (Q.1) + lama beneficiary of an endowment created by my mother. The endowment pays an annuity of Rs. 10,000 p.a. for 5 years. Given that the APR is 5% p.a., calculate the current value of the endowment. 1201/08/2019 Annuity (Q.1) + lama beneficiary of an endowment created by my mother. The endowment pays an annuity of Rs. 10,000 p.a. for 5 years. Given that the APR is 5% p.a., calculate the current value of the endowment. ‘ueston pe APR const Sol: 10000 cash flow, and no. of periods wae sary . provided. Calculate PV PVo= Dos (- Gog) = 43.295 OR PVo = 10,000 *PVAF(5%, 5 periods) = 10,000 *4.3295¢eonntieasy = 43,298 Annuity (Q.2) + |ama beneficiary of an endowment created by my mother. The endowment accrues an annuity of Rs. 10,000 p.a. for 5 years. Given that the APR is 5% p.a., calculate the maturity value of the endowment. 1301/08/2019 route (ame) Ltt = o + lama beneficiary of an endowment created by my mother. The endowment accrues an annuity of Rs. 10,000 p.a. for 5 years. Given that the APR is 5% p.a., calculate the maturity value of the endowment. Sol: ‘Question type: APR, constant i Chow andve sips v5 = 10,000 22222 rowed autor 7 7 0.05 = eee FV; = 10,000 *FVAF(5%, 5 periods) = 10,000 *5.5256¢¢mntiens) = 55,256 Annuity (Q.3) + 1am a beneficiary of an endowment created by my mother. The endowment pays an annuity of Rs. 10,000 p.a. for 5 years, after 2 years from now. Given that the APR ,,;9;,.., Calculate the current value of the endowment. 1401/08/2019 oF eo Annuity (Q.3) LTS Te PE IAI | o 1 7 * lama beneficiary of an endowment created by my mother. The endowment pays an annuity of Rs. 10,000 p.a. for 5 years, after 2 years from now. Given that the APR is 5% p.a., calculate the current value of the endowment. Sol: ‘Question type: Delayed annuity. _ 10,000 i APR, constant cashflow, and no. of PV0 = costons(l- Giga) = 39.270 OR periods provided, Calculate PY PVp= Gag 10,000 *PVAF(5%, 5 periods) = 0.907"10,000 4.3295 = 39,270 Annuity (Q.4) + lam a beneficiary of an endowment created by my mother. The endowment pays an annuity of Rs. 10,000 p.a., starting now, for 5 years. Given that the APR is 5% p.a., calculate the current value of the endowment. 1501/08/2019 pty (8 Lii ii + | ama beneficiary of an endowment created by my mother. The endowment pays an annuity of Rs. 10,000 p.a., starting now, for 5 years. Given that the APR is 5% p.a., calculate the current value of the endo\ Sol: ‘Question type: Annuity starting now. APR, constant cashflow, a T0000), 1 = ye and no. of periods provided PVp = 10,000 + “F(a pa) = 45,460 OR Boner PVo = 10,000 + 10,000 *PVAF(5%, 4 periods) = 10,000+10,000 *3.546 0 in ntiea 45,460 Annuity (Q.5) + lama beneficiary of an endowment created by my mother. The endowment accrues an annuity of Rs. 10,000 p.a. for S years, starting now. Given that the APR is 5% p.a., calculate the maturity value of the endowment, as on the year end. 1601/08/2019 Annuity (05) Weoery } Lf tt is + lama beneficiary of an endowment created by my mother. The endowment accrues an annuity of Rs. 10,000 p.a. for 5 years, starting now. Given that the APR is 5% p.a., calculate the maturity value of the endowment, as on the year end, Guesion pe: Aut sarng now Sole APR constant cash low, an oof 7 periods provided. Calculate FV ent FV; = 10,000*1.05*(¢°-~+ = 58,019 oR FVs = 10,000 *FVAF(S9 %, 5 periods)*1.05 0,000 *5.5256 ram nnieas) *1.05 = 58,019 Annuity (Q.6) * lama beneficiary of an endowment created by my mother. The endowment accrues an annuity of Rs. 10,000 p.a. for 5 years. Given that the APR is 5% p.a., is the maturity value of the endowment sufficient to buy a bond with 2 year maturity, 10% coupon and face value of 50,000? 701/08/2019 C+ FaceValue Annuity (Q.6) + lam a beneficiary of an endowment created by my mother. The endowment accrues an annuity of Rs. 10,000 p.a. for 5 years. Given that the APR is 5% p.a., is the maturity value of the endowment sufficient to buy a bond with 2 year maturity, 10% coupon and face value of 50,000? Sol: ‘Question type: Comparing Annuities: PVE; = 10,000(222—4 = 55,256 OR 0,000 *FVAF(5%, 5 periods) = 10,000 *5.5256 rom ntiean = 95,256 PV.Bs = (10%* 50,000)*PVAF(5%,2 periods) + = 5000"1.8594 (rom tabieaz) + Annuity (Q.7a) + lama beneficiary of an endowment created by my mother. The endowment pays Rs. 10,000 every second year, for 6 years. Given that the APR is 5% p.a., calculate the current value of the endowment. 1801/08/2019 —t_} —— + | ama beneficiary of an endowment created by my mother. The endowment pays Rs. 10,000 every second year, for 6 years. Given that the APR is 5% p.a., calculate the current value of the endowment. Question type: Holding period Sol: > L year. APR, constant cash Holding Period Return = (1.05)? -1 =10.25% flow, and no. of periods 10,000, 1 Pics PY = “Gieas Ct Gaoasp) = 24.759 OR PVp = 10,000 *PVAF(10%, 3 periods) = 10,000 *2.48 (jam tebe pony (7a) 24,800 Annuity (Q.7b) + | ama beneficiary of an endowment created by my mother. The endowment pays Rs. 1,000 every month, for 4 years. Given that the APR is 12% p.a., calculate the current value of the endowment. 1901/08/2019 Annuity (Q.7b) * lama beneficiary of an endowment created by my mother. The endowment pays Rs. 1,000 every month, for 4 years. Given that the APR is 12% p.a., calculate the current value of the endowment. Be Si ‘Question type: Holding period Sol <1year APR, constant eth Holding Period Return = 12%/12=1% flow, and no: of periods 1000, 1 provided olelate PV Pv = SO (1- seas) = 37,974 OR PV = 1,000 *PVAF(1%, 48 periods) = 1,000 *38(jom Tabiea2) 38,000 Annuity (Q.8) + lama beneficiary of an endowment created by my mother. The endowment pays Rs. 10,000 growing at 2% for 5 years. Given that the APR is 5% p.a., calculate the current value of the endowment. 2001/08/2019 Annuity (Q.8) + Lama beneficiary of an endowment created by my mother. The endowment pays Rs. 10,000 growing at 2% for 5 years. Given that the APR is 5% p.a calculate the current value of the endowment. oy [aiesion ype: PV ot Growing anny ] 10000,, 1.02%, _ 7 gor gap) = 44975 PVy= 21