eee ww! Ceandy, ye 2M ( ur art bhng aad =) Se ¢ periods , then valu, Cormboordiny affercach, 4 Ho beval ) Sironty , if we divde L year ito n verre ve Gaye nf = (+z ) ( #2)) Ufen we ave torrburpdiea, yeards. we get value n V's (rex) A 2 (4)? =.) 94 v>0, Then v 5 Due to this new term aries Rene name = effective inleret vote Example :- Supper A=1, annual vate of interest is 87. h of we are compounding quariente , the value after 4: [v= 8% = 208 4 = ( 1t.0-02) = (vers? = [0894 PPP PP LLY Liddedddiddddddddeads 23333 Scanned with CamScannerVELLELELULELUDEUVUUUUUUUVU UU Ee edd Effective. interest vate = C0324 -1)) R00 % EISNER TEN, TORE = 0.0824 KIoo 7. * = Bae wor ake Arwnval ode of interest of the bank & which i 8%, Brow ot nominal rate. IF we divide one year mm4o Ym equal periads, then after kth period growth 185 K (+e). ‘ And growth after one yewr (or after mth periad) ts + Wey The effechive interest vote x! tabisfiey the foowme, equations jar! e ie m Mf money inverted im a bom ss A dollar, nominal vale of interest is ¥, We are dividing whole year inte im equal part. and compaunding. after every baited rs i Effective interest vote ov satiafter the foHowny » Atv! = (+3) A “gan Scanned with CamScannerContinuous Compounding e lle con smagine dividing, the year nto gmatler and smalley periods , and Hereby. abbly 4 Compounding. monty, weekly , deity , ar even every minute 4 Or second. This Jeads 4o the fdea of conhinuous com poun sing Subbose we are dividing, i engl Yors one year into m qa € ports. @ Then volue after one year C compourdling after each © period) is: m Ve (+2) (b=). New ~f m become smaller and smaller or we may aay , m-s@, Then m V= Lm (oe j M3 © a Woe ( e+ 27418...) In this situadion, effective interest rode y! sodistyimg. lays e™ : Evomble:. 9 frincipal anronvecett amount & L dota , and the nominal “mlerst vole is 87 ber {eer Then | unity Conhnuow tompeunding: value uu ‘be PPBDPLLDPLBPDPPBDADADDND ODD ® V= ev? = [+9939 Scanned with CamScannerVV VE VF VV VU VU TUE PEO RP OE VECUOPCUUGCHbOUYe Effective interest vate js od viz(e mp) Kio ei 0933-1) x 100 7, = 60-0833 Kioo 7%, = 9-33 7, Lbsave. Nominal rmteret vale 1% 81. ber gear Effective mmilerat rate (corboundirg quarterly 1& G-24y,. Effective interat vase (with eonbinvors tomipaon ding) 81357, z The nominal rode Mmeregsa., the compounding effeot become more dramatic. Sea the fellouing table. Interest rede Cy) Nominol vate ! 5 ‘10 | 20 |%o cae ; ; 4 - - [34-99] 66-94] . Effective mote | bol [S13 |losa} 20 | oy \é 8] 30 [re We are tobing, effecttve interest vate uncler continu ou (orm bods #& Now we calewote fow mucR an aceount wit) Rouse” grown often any orbi-trory dength of tme:- Subbox brncipal ammount is A =) doar. and nominal inlercs + mode 1. We donate tre be the vowable +, meawrel iy geors- ect a time & Now sdee lee ee ot a t L Scanned with CamScanner‘Divide the yeav into @ enetgh dorge number m of small bemeds , each of tena puch thot t= kK. for game , Tha meoms thed k herrede abbroximal dy cto, comejde with the me +, Again ia > > Kemt Therefor, value of money. , ith ar after each period 1, after KH pend, that ai ot time ¢) ie: ve awh 55 (vay. And value of money with continuous comparing. after af time t ib! mt Vv = lm (+4) m M30 t = to [bay ] mse ™ Ps ett £ 4 gous are fovesting mai A dotlay , then value ok drme a / we Cordinuon i deads exponential growth jn accoun +}. Scanned with CamScanner > PORTE ERD Tanyas sasas. s DPVOVVVVUVUL UUW UWI WW UCU oCuvnnouvuweTre The seven—ten rule | Moree invaded at ay, per year double: jn abbreximalely Jo years. Also, moner inverted of 10 7, ber year double, in abbroxi mad ot Feo: & Mare enables » at Hy, and Jo years , am account inerears by a factor of }9%, wherear af lo % and + gens Jd vngveans, by @ factor of 1.95. £ The rude can be generalized a4 fallous: For interest rales dew than about goy,, the otectath. doubling, time is obbreximadely #, where & is the sntorest vale exprcied! ct a percentage. (for ecamples for Joy, C= 10.) Debt:- 94 yeu borrow mone, from the banb at an Molerert ode Y ard robe no Payrrents to the banb, then gor debt increages cea to the same formulas . For example:- 9f you borrow A deer from the bab ard” eS twlerest vote ts. Of your debt 23 compounded quarks » thm cebh mf es ofier 9 months ia : (1+ ze af your deb a3 eomporded ments then after K months yan debt cy Frsere Yum Hy a3: y ar Scanned with CamScannerTn cax of eembnuow eenbarsiions after Hime 4, your debt is _ que Prevent Value !- Cortider two situations : (D You us receive $ifo in £ year, (1) Y receive {loo now and efosit 4t ina ban account for one year at Joy. interest, One can observe very ear that gituations ave idenhcol afte ore year: you wil) meceive $ilo. Both statements are equivalent We say thot Wie 0 kas Age received in ome year is equivalent to the veceibt of $100 now when the imberest vate is 107. + Or we aay that the ilo to be received im 1 year Rora present value of $ lov. Observation: lao Se 12 OMS 0. 7 tee tral ‘ he 1 Adso Futur. Volue = (ivr). Presend Value Prejenk Vehin = Futur Value \+y ee Ee ante cel # Im geneal, $] to be received a yar tn the furhire Bax a bresemt volue of 1e , when 7b te rmbrest rate, mn BDL DEPLED DP PIED ILRI SSS SPSS SSS SiSi2i5\ Scanned with CamScannerDROP IWOCIGGEELE = > 2 = > > 2 > > > > 5 > 3 a 7 For’. debt:- Supbor for. some acason , you Roue.on obligation #0 pox gomeone $100 in exoclty \L year, This obligahon can be wegraded aso rnegative cash flow Hat occurs of the end of the year, To calculate the present value of ths absigotran , you determune Bow much money. you would need now i» order to covey the -abligahon. gf the current yer, interest vrate is 'y, then preset value of the abligatn iss = ¢ 1 at cape Thed means, uf you debssited $ a vy @ bank now, J+ ui yo to gioo ot the end of the qe": The proce of evaluating future obligahions a4 an equivalent present value is aHewmativdy refered ma too discounting. bs The present value of a futux monetary amount is lex Ve than the face value of that amount, 4o the future volue must be diswunted to oblain the resent volwe. The factor by whicQ the -fulur volue must be aliseaunteal cas the, com fon oe 4 The one year ditenunt factoy js = 45 , where ¥ ig the one year rotencst vote. vw Sf amount Ao to be received im L yer, the [present value 1a the oliscountes! arnount Scanned with CamScannerFER Suppo year & dlivideat into m equal port or periadks 5 interest vole 1% %, and suppor that a cash payment of amount A will be received ot end of Kth period. Then discount foctor ts dhe = 142 Ea: The present value of a oe of A to be vecerved K periods m the futux ts Wh, Kiedy Sik. Puesemt and future Values of cash flow streams :— The oka! Bonk! op PPR PPRPLEPLLRILMITITIIIISAISS Scanned with CamScanner