Interest and Money-Time Relationships

Perpetuity
Simple Interest A
I =PNi P=
i
where: where:
P=¿ principal amount A=¿ payment per period
N=¿ number of interest periods P=¿ present value of perpetuity
i=¿ interest rate per interest period

Compound Interest
Linear Gradient Series

A=P ( 1+i )N
where:
A=¿ amount (future value)
P=¿ principal amount (present value)

Nominal and Effective Interest Rates Present Value

P=P A + PG
r n
(
i eff = 1+
N )
−1 where:
n
P A =A [(1+i) −1]/( i(1+i) )
n

where:
i eff =¿ effective interest rate per payment period PG =G/i{[(1+i)n −1]/i−n }{1 /(1+i)n }
r =¿ nominal interest rate Future Value
N=¿ no. of compound periods per year F=G/i{[(1+i)n−1]/i}−nG/i
n=¿ no. of compound periods per payment period
Equivalent Annuity
Present and Future Values A=G{1/i−n/[( 1+ i)n−1]}
F
P= Bond Valuation
( 1+i )n
Bond Value
F=P ( 1+i )n C [ ( 1+ k d ) n−1 ] M
where: v B= n
+ n
P=¿ present value of money k d ( 1+ k d ) ( 1+ k d )
F=¿ future value of money where:
v B=the bond ’ s value∨bond price
Annuity C=¿ coupon payment per period
A [ ( 1+i )n−1 ] ¿ coupon rate × par value (adjust if not annual)
P= k d=¿ market interest rate (per payment period)
i ( 1+i )n
n=¿ time to maturity (adjust if not annual)
A [ (1+i )n−1 ] M =¿ par or maturity value
F=
i Rate of Return
where:
A=¿ payment per period Rate of return=current yield+ capital gain
P=¿ present value of annuity C Price sold−v B
F=¿ future value of annuity Rate of return= +
vB vB

Current Yield
C
Current yield=
vB

Yield to Maturity
 C [ ( 1+YTM )n−1 ] M
v B= n
+
YTM ( 1+YTM ) ( 1+YTM )n

Yield to Call

C [ ( 1+YTC )n −1 ] CP
v B= n
+
YTC ( 1+ YTC ) ( 1+YTC )n

Geometric Gradient Series

Present Value
(1+ g )n ( 1+i )−n−1
P=C [ g−i ]
for g ≠ i

Cn
P=
1+ g
for g=i

Future Value
( 1+ g )n−( 1+i )n
F=C [ g−i ]
for g ≠ i

Cn ( 1+i )n
F=
1+ g
for g=i

where:
P=¿ present value of cash flows
F=¿ present value of cash flows
C=¿ cash flow in period 1
g=¿ rate of change per period
i=¿ effective interest rate per period