used for hom e m or t gages, aut o lo

ans, business loans, r et ir em ent pl

ans, et c.

Ge n e r a l Fo r m u l a r
Lo a n A m o r t iza t io n
1. Find t he r equir ed annual pay m ent

2. Find t he int er est paid in Year 1 Even cash flow

4 st eps
3. Find t he pr incipal r epaid in Year 1
M u l t i p l e Ca s h Fl o w Uneven cash flow
Fl o a t i n g
4. Find t he ending balance aft er Year 1

Repeat st eps 1 – 4 unt il end of loan

TVM
A secur it y t hat pay s for an infinit e am ount of t im e
A p p l i ca t i o n A ser ies of equal cash flow s at fixed
int er vals for a specified num ber of per iods.
Per pet uit y Or dinar y
Pe r p e t u i t y Equal cash flow is called pay m ent (PMT)

Per pet uit y Due An n u it y

Or dinar y annuit y

Gr ow ing Per pet uit y Or dinar y 2 t y pes

Gr ow ing Per pet uit y Due Annuit y due

Gr o w i n g p e r p e t u i t y
CF1 = cash flow in one per iod
r = t he int er est per per iod
g = t he gr ow rat e (r > g)
 Shares represent ownership
A long- t erm debt inst rum ent
At t end t he AGM
Shar es an d t h eir Face Value
Nom inat e and vot e t op posit ions ch aract er ist ics Bonds & t heir
Pr ice
Make im por t ant decisions ch aract er ist ics
Shareholder has right s Mat ur it y dat e
Claim s over t he asset s and e
ar nings of t he fir m. Key Feat ures of a Bond Ter m t o m at ur it y

Receive div idends The y ield

Oppor t unit y cost

Div idend Coupon pay m ent s

Se cu r i t i e s
Va l u a t i o n Coupon

PV/ Price
Const ant gr ow t h st ock
Dividend growt h m odel

The div idend st r eam w

ould be a per pet uit y Bond valu at ion
No gr ow t h st ock (g = 0) Shar es valuat ion Measuring bond yield

I nt er est rat e r isk: Risk of declining in a bon d’s pr

ice due t o an incr ease in int er est rat es

Corporat e value m odel Reinvest m ent r isk: The r isk t hat a declin
Bond risks e in int er est rat es w ill lead t o a decline in
incom e fr om a bond por t folio

Default r isk: Risk t hat bor r ow er ar e incapabl

e of pay ing back pr incipal or/ and int er est pr
om pt ly (i n full and on t im e)