international trade

DANIYAL 27
MEHAK 18
MEHTAB
SAAM
 TIME VALUE OF
1 TIME
2 INFLATION INTEREST RATE

INTEREST RATE = DISCOUNT RATE = YIELD = RETURN= OPPORTUNITY CO

IR= REAL RATE + EXP INFLATION

SIMPLE INTEREST

COMPOUNDING INTEREST

A BANK PAYS 10% SIMPLE INTEREST FOR 3 YEARS

ANOTHER BANK IS OFFERING 10% COMPOUNDING FOR 3 YEARS
CALCULATE BOTH BANKS FV VALUE
WHICH BANK WILL PAY MORE AND HOW MUCH

SIMPLE FV 8,000.00

COMPOUNDING FV 8954.2385

DIFFERENCE 954.24

APR= ANNUAL PERCENTAGE RATE

EAR= EFFECTIVE ANNUAL PERCENTAGE

EAR=(1+APR/M)^M-1

M = NO OF PERIODS
 BANK OFFER 12% ANNUALY
BANK OFFER 12% SEMI ANNUALY
BANK OFFER 12% QUARTERLY
BANK OFFER 12% MONTHLY
BANK OFFER 12% WEEKLY
12% DAILY

8.30% 0.0066667
1.0066667
1.0829995
8.3000%

PRESENT VALUE ALSO KNOWN AS DISCOUNTING

PV=FV/(1+IR)^N

1 IF IR INCREASE THAN PV DECREASE AND VISA VERSA

2 IF N INCREASE THAN PV DECREASE AND VISE VERSA

FUTURE VALUE ALSO KNOWN AS COMPOUNDING

FV=PV*(1+IR)^N
1 IF IR INCREASE THAN FV INCREASE & VISE VERSA
2 IF N INCREASE THAN FV INCREASE & VISE VERSA
PV IR 10
0 1 2 3 4
6785 1500 ? 1800 2400

PV=1500/(1+10%)^1 1363.63636
PV=1800/(1+10%)^3 1352.36664
PV=2400/(1+10%)^4 1639.23229
PV 4355.2353
6785-4355
2430 FV=2430*(1+10%)^2
2940.3
 TIME VALUE OF MONEY

INTEREST RATE

YIELD = RETURN= OPPORTUNITY COST= NOMINAL RATE =POLICY RATE

BANK, NSS, GOVT BONDS

INTEREST AMOUNT =PV*IR*N

FV=PV+IA

FOR 3 YEARS
OMPOUNDING FOR 3 YEARS

HOW MUCH

IA=5000*6%*10
FV=5000+3000
FV=PV(1+I)^N

WITHOUT COMPUNDING

WITH COMPOUNDING

APR EAR
 12% 12%
12% 12.36%
12% 12.55%
12% 12.68%
12% 12.73%
12% 12.75%

EAR=(1+12%/1)^1-1
12%

COMPOUNDING EFFECT
N*M
IR/M

Offered rate is 12 percent. FV

a. You invest $1000 at this rate. What is the investment worth after five years? PV
b. What is the PV of $5 million to be received in eight years? IR
N
15
Which would you prefer?
An investment paying interest of 12 percent compounded annually. B
An investment paying interest of 11.7 percent compounded semiannually
FV
IR
N
PV
S, GOVT BONDS

SIMPLE
IA=PV*IR*N 1000*10%*3 300
FV=PV+IA 1000+300 1300

COMPOUNDING
IA=PV*IR 1000*10% 100
FV1=1000+100 1100
IA=1100*10% 110
FV2=1100+110 1210
IA=1210*10% 121
FV3=1210+121 1331

BANK B
HOW MUCH
1331-1300 31

FV=PV(1+IR)^N 1000*(1+10%)^3 1331

3000
8000
5000*(1+6%)^10 8954.238

COMPUNDING RATE M
ANNUALY 1
MPOUNDING SEMI ANNUALY 2
QUARTERLY 4
MONTHLY 12
WEEKLY 52
DAILY 365
 0.36%
0.19%
0.13%
0.05%
0.02%

EAR=(1+12%/2)^2-1

12.360%

? FV=1000*(1+12%)^5
1000 1762.3416832
12%
5

20194
5,000,000.00 5000000/(1+12%)^8
12 2,019,416.14
8