TIME VALUE OF MONEY

• Single interest: FV = PV x r x n
!"
• Compound interest: FV = PV ´ (1 + r)t => PV = ($%&)!

à Annuity: a finite series of equal payment that occurs at

regular intervals.
• Ordinary annuity: trả cuối năm (1st cash flow starts one year from
today)

($%&)" ) $
FV = C * ! " → gives a value at the time of the last cash flow.
&
* $
PV = & !1 − ($%&)"
" → gives a value at 1 period before the 1st CF

happens.

• Annuity Due: trả đầu năm (1st cash flow starts now)

FV = FVordinary * (1 + r) PV = PVOrdinary * (1 + r)

à Growing annuity: C grows at a constant rate of “g”

* * $%+ -
FV = &)+ × [(1 + 𝑟), − (1 + 𝑔), ] PV = &)+ × /1 − 0 $%& 1 2

à Perpetuity: an annuity with infinite number of payments.

* *
PV = => Growing perpetuity: PV = &)+
&
 à NOMINAL vs REAL interest rate:

- Nominal interest rate: Rate at which money invested grows.

- Real interest rate: Rate at which the purchasing power of an
investment increases.

$%,./0,12 &1-3
1 + real rate = $%0,421-0., &1-3

- Nominal cash flows must be discounted by the nominal interest.

- Real cash flows must be discounted by the real interest.

à Annual Percentage Rate (APR)

- Use simple interest and ignore the compounding effect.
APR = rper x m
- R per: interest charged per period
- m: number of compounding periods during a year
ð The APR if the semiannual rate is 0.5% = 0.5% x 2 = 1%

à Effective ( equivalent ) Annual Rate ( EAR )

- Use compound interest, and compare the investments with
different compounding periods.
567 /
EAR = (1 + /
) - 1

- Compounded annually => APR = EAR.

 Payout figure: remaining debt (khoản tiền còn nợ sau khi
trả 1 khoảng thời gian)

8 $
PV = & !1 − " k: số năm đã trả nợ
($%&)"#$

à Refinancing: Vay khoản nợ ở bank mới để treminate khoản

nợ ở bank cũ.
Step 1 : Calculate the remaining balance on your current
loan
Step 2: Calculate the new monthly payment (C)
The amount borrowed at the NEW bank = Remaining loan
+ Transaction cost.
Step 3: Compare repayments, ì new C í smaller => Should
rèinance
à Choosing mortage: Chọn vay nợ ở bank nào
- Compare monthly payment (C) ở mỗi bank.
- Cho monthly fee => Add vào monthly payment (C)
- Cho upfront cost: Add vào khoản nợ sẽ vay.

à Amotizing: illustrated by the example below:

- The process of providing a loan to be paid off by making
regular principal reductions
- E.g: Suppose you enter a fixed-rate mortgage loan of $22,000
at 12%p.a compounded annually. The loan is repaid every year
over 6 years

Year Installment Annual Principal Principal

payment interest payment amount
owing at
year end
0 22,000
1 5,351 2,640 2,711 19,289
2 5,351 2,315 3,036 16,253
3 5,351 1,950 3,401 12,852
4 5,351 1,542 3,809 9,043
5 5,351 1,085 4,226 4,777
6 5,351 573 4,778 (0)
 BONDS

à Coupon payment: fixed interest payment over bond’s life.

!183 "1293 × *.9;., &1-3

Coupon payment = <9/=3& .4 ;1>/3,- ;3& >31&

à Bond valuation

!183 "1293
• Zero coupon Bond: PV =
($%&)!

• Coupon bond:

* $ !183
PV = × !1 − " +
& ($%&)! ($%&)!

r : YTM or Discount rate (current interest rate)

𝐶𝑜𝑢𝑝𝑜𝑛 > 𝑌𝑇𝑀

o Premium Bond => 3
𝑃𝑟𝑖𝑐𝑒 > 𝐹𝑎𝑐𝑒

𝐶𝑜𝑢𝑝𝑜𝑛 < 𝑌𝑇𝑀

o Discount Bond => 3
𝑃𝑟𝑖𝑐𝑒 < 𝐹𝑎𝑐𝑒
5,,912 8.9;., ;1>/3,-
o Current yield =
*9&&3,- /1&?3- ;&083

5,,912 8.9;.,%6&083 *@1,+3 5,,912 8.9;.,%(6$)6D)

o Rate of return = =
A,B3C-/3,- 6D
 STOCK

• Zero growth:
D1=D2=D3=…=DN: Constant =>. Compute price P0 by
perpetuity
E
P0 =&
%
• Constant growth:
Dividends will grow at a constant rate “g” forever => Using
growing Perpetuity.
Dt=D0 x (1+g)t
E E ×($%+)
P0 = & = (
&' )+ &' )+

“Just paid”, “recently Paid” => D0

“D is expected…”, “D is projected…” => Dt

At time k:
E$)& E( ×($%+)$)&
Pk = =
&' )+ &' )+

à Non-constant growth
1. Dividends will grow at rate g1 for N years and grow at rate g2 therea@er.
E ($%+& )* E $
P0 = &)+& × !1 − ($%&)*
" *)&
+ 0&)+ 1 × ($%&)*
& +

With DN+1 = D0 (1+g1)N (1+g2)

2. Non-constant growth followed by constant growth:

E E E E $
P0 = ($%&& + ($%&+ )+ + ⋯ + ($%&* )* + (& *)& × ($%& *
,) , )+) , , ,)

3. Payout ra2o: % of profit used to pay dividends.

FGH (FIJIKLMK NLO PQROL)

Payout raOo = SGH (SROMIMT NLO PQROL)
 Plow-back ra2o (RetenOon rate): % of earnings retained and reinvested
in the firm.

Plow-back raOo = 1 – Payout raOo

ð g = Return on new investment × Plow-back raOo

E& E
P0 = & => rE = 6& + 𝑔 = Dividend yield + Capital gain yield
, )+ (