FM

CH – 5 – Time Value of Money

Future Value of Single Amount :

In Excel
𝐹𝑉 = 𝑃𝑉 (1 + 𝑟 ) =FV ( rate, nper, pmt, [pv], [type] )

Present Value of Single Amount :

𝐹𝑉 In Excel
𝑃𝑉 =
(1+𝑟) =PV(rate,nper,pmt,[fv],[type])

Future Value of an Ordinary Annuity (at the end of each period)

In Excel
[ ( 1 + 𝑟 ) − 1] =FV ( rate, nper, pmt, [pv], [type] )
𝐹𝑉 = 𝐶𝐹
𝑟 =FV ( rate, nper, pmt,0,0)

[ ordinary annuity type 0]

Present Value of an Ordinary Annuity (at the end of each period)

In Excel
𝐶𝐹 1 =PV(rate,nper,pmt,[fv],[type])
𝑃𝑉 = 1−
𝑟 (1 + 𝑟 ) =PV(rate,nper,pmt,0,0)

[ ordinary annuity type 0]

Future Value of an Annuity Due (at the begining of each period)
In Excel
[ ( 1 + 𝑟 ) − 1] =FV ( rate, nper, pmt, [pv], [type] )
𝐹𝑉 = 𝐶𝐹 (1 + 𝑟)
𝑟 =FV ( rate, nper, pmt,0,1)

[annuity due type 1]

Present Value of an Annuity Due (at the begining of each period)

In Excel
𝐶𝐹 1 =PV(rate,nper,pmt,[fv],[type])
𝑃𝑉 = 1− (1 + 𝑟)
𝑟 (1 + 𝑟 ) =PV(rate,nper,pmt,0,1)

[annuity due type 1]

Present Value of a Perpetuity

𝐶𝐹
𝑃𝑉 =
𝑟

Present Value of Growing Perpetuity

𝐶𝐹
𝑃𝑉 =
𝑟−𝑔

Present Value of Growing Annuity

𝐴 1+𝑔
𝑃𝑉 = 1−
𝑟−𝑔 1+𝑟

Future Value of Growing Annuity

𝐴
𝐹𝑉 = [(1 + 𝑟) − (1 + 𝑔) ]
𝑟−𝑔
Future Value of Mixed Stream / Mixed Cash flow
In Excel
Consider all cash flows as the cash flow is different each = - FV(rate,nper,pmt,NPV(rate,value1,…[valueN]))
time. = - FV(rate,nper,0,NPV(rate,value_series))

Present Value of Mixed Stream / Mixed Cash flow

In Excel
=NPV(rate,value1,[value2],[value3],..,[valueN])
= NPV(rate,value_series)
Future Value Compounding (more frequently than annually)
In Excel
𝑟 ∗
Annually =FV ( rate, nper, pmt, [pv], [type] )
𝐹𝑉 = 𝑃𝑉 1 +
𝑚
Semi-annually =FV ( rate/2, nper*2, 0,pv,0)
m = no. of times per year interest is compounded.
n = no. of year Quarterly =FV ( rate/4, nper*4, 0,pv,0)
Annually, m = 1
Semi-annually, m = 2 Bi-monthly =FV ( rate/6, nper*6, 0,pv,0)
Quarterly, m = 4
Bi-monthly, m = 6 Monthly =FV ( rate/12, nper*12, 0,pv,0)
Monthly, m =12

Present Value Compounding (more frequently than annually)

In Excel
𝐹𝑉 Annually =PV ( rate, nper, pmt, [fv], [type] )
𝑃𝑉 =
𝑟 ∗
1+ 𝑚
Semi-annually =PV ( rate/2, nper*2, 0,fv,0)

m = no. of times per year interest is compounded. Quarterly =PV ( rate/4, nper*4, 0,fv,0)
n = no. of year
Annually, m = 1
Bi-monthly =PV ( rate/6, nper*6, 0,fv,0)
Semi-annually, m = 2
Quarterly, m = 4
Monthly =PV ( rate/12, nper*12, 0,fv,0)
Bi-monthly, m = 6
Monthly, m =12

Continious Compounding
∗ In excel
𝐹𝑉 = 𝑃𝑉 ∗ 𝑒
= PV*EXP(Rate* no. of years)

Effective Annual Return

In excel
r =EFFECT(nominal_rate,npery)
𝐸𝐴𝑅 = 1 + −1
𝑚
Annually , nper = 1
m= frequency Semi-annually , nper = 2
Quarterly, nper = 4
Effective Annual Return Continious Compounding
𝐸𝐴𝑅 = 𝑒 − 1
CH 6 – Bond Valuation

Bond Valuation Behaviour

BdV= Bond Value
CR = Req.RR (DR)  BdV = FcV DR = Discount Rate ~ RRR = Required Rate of Return.
CR > Req.RR (DR)  BdV > FcV CR = Coupon Rate
CR < Req.RR (DR)  BdV < FcV FcV = Face Value

BdV is inversely proportional to DR/YTM

Yield Curve
IR/YTM
 YTM is usually upward sloping (economy id
good condition)

Time to Maturity

IR/YTM
 Indication of Recession

Time to Maturity

Bond Valuation

1 1 In Excel:
= 𝐶𝐹 + 𝐹𝑉
(1 + 𝑟) (1+𝑟)
=PV(rate,nper,pmt,[fv],[type]) +
PV(rate,nper,pmt,[fv],[type])
𝐶𝐹 1 1 Example:
= 1− + 𝐹𝑉
𝑟 (1 + 𝑟 ) (1+𝑟) =PV(8%/2,10*2,-50,0,0) + =PV(8%/2,10*2,0,-1000)
Or,
Semi-annually (m)
𝐶𝐹 1 1 =PV(8%/2,10*2,-50,-1000,0)
= 𝑟 1− 𝑟 + 𝐹𝑉 ∗
(1 + ) ∗ (1+𝑟)
𝑚 𝑚

YTM
In Excel
𝐹𝑉
𝑅𝑎𝑡𝑒 = =Rate(nper,pmt,pv,[fv],[type],[guess])
𝑃𝑉
YTM Annual Interest
In Excel
=IRR(values,guess)

Current Yield
𝐶𝑜𝑢𝑝𝑜𝑛 𝑌𝑖𝑒𝑙𝑑
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑖𝑒𝑙𝑑 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒

𝐶𝑜𝑢𝑝𝑜𝑛 𝑌𝑖𝑒𝑙𝑑 = 𝐶𝑜𝑢𝑝𝑜𝑛 𝑅𝑎𝑡𝑒 ∗ 𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒

CH 7 – Stock Valuation

𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 =

𝐴𝑠𝑠𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑎𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦

𝐿𝑖𝑞𝑢𝑖𝑑𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑖𝑜 =
𝑁𝑜. 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒

𝑃𝐸 = , 𝐸𝑃𝑆 =
.
,

𝐹𝐶𝐹 = 𝐸𝐵𝐼𝑇 (𝐼 − 𝑇) + 𝐷𝑒𝑝 − 𝐶𝑎𝑝𝑒𝑥 − ∆ 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑁𝑒𝑡𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

CH 10 – Capital Budgeting Technique

Payback Period: The amount of time required for the firm to recover its initial investment in a project (as calculated
from the cash flow).

In Case of Annuity

the payback period can be found by dividing the initial investment by annual cash flow.

In case of Mixed stream cash flow

the yearly cash inflows must be accumulated until the initial investment is recovered.

Decision Criteria:

 If payback period < maximum acceptable payback period => ACCEPT Project
 If payback period > maximum acceptable payback period => REJECT Project

Drawback of Payback period

 The payback period is merly subjective to the firms expectation.

 It cannot be used for wealth maximization goal as it does not invole discounting cash flow.
 Payback period approach doesnot account for the time value of money.

Ex- Calculate payback period and discounting payback period for the below project

0 1 2 3 4 5

-10000 3000 5000 6000 4000 3000

PBP using Excel calculation

0 1 2 3 4 5 Total
-10000 3000 5000 6000 4000 3000
6000/12
500*4
8000 2000 10000
2yrs 4 months

The payback period in this case in 2 yrs 4 months.

DPBP using Excel calculation

Discounting @10 %
0 1 2 3 4 5 Total
-10000 3000 5000 6000 4000 3000
3000/1.1 5000/1.1^2 6000/1.1^3
2727.2727 4132.2314 4507.88881 11367.39
4507/12
375*10
2727.2727 4132.2314 3750 10609.5
2 yrs 10 months

The discounting payback period in this case in 2 yrs 10 months.