Business Finance

(MGT 232)

Lecture 7

4-1
Time
Time Value
Value of
of Money
Money

4-2
 Overview of the Last Lecture
• Uneven Cash flow Streams
• Impact of frequency compounding
• PV and FV Compounding
• Nominal Interest rate
• Periodic Interest rate
• Effective Annual Interest rate

4-3
 Impact of Frequency
Suppose Ali will have Rs. 1000 after 2 years at an
annual interest rate of 12%. What is its PV?

Annual PV=

Semi PV=
4-4
 Impact of Frequency
Qrtly PV

Monthly PV =

Daily PV =
4-5
 Impact of Frequency
Ali has to make equal payments of Rs.1,000 for 2
years at an annual interest rate of 12%. What
lump sum amount he should deposit today?
Annual PVA =

Semi PVA =

4-6
 Impact of Frequency
Qrtly PVA

Monthly PVA =

Daily PVA =
4-7
 Finding ‘i’ in Time Value of
Money Problems
• Suppose you deposit Rs. 1000 today that will become Rs.
1469 after 5 years. What interest rate you would earn on your
deposit?

4-8
 Finding ‘n’ in Time Value of
Money
• Suppose you deposit Rs. 100 and you will have Rs. 115 at an
interest rate of 5%. Hw much time it will take to earn Rs. 115?

4-9
 Loan Amortization
• If a loan is to be repaid in equal periodic
payments, it is said to be amortized loan.
• It is an application of compounding interest
and annuity.

• Example: Car Loan, Mortgage Loan, Student

Loan

4-10
 Steps to Amortizing a Loan
1. Calculate the payment per period.
2. Determine the interest in Period t.
(interest x Beg. Amt)
3. Compute principal payment in Period t.
(Payment - interest from Step 2)
4. Determine ending balance in Period t.
(Balance - principal payment from Step 3)
5. Start again at Step 2 and repeat.
4-11
 Amortizing a Loan Example
Ali is borrowing Rs.10,000 at a compound annual
interest rate of 12%. Amortize the loan if annual
payments are made for 5 years.
Step 1: Payment
PV =

4-12
Loan Amortization Schedule

4-13
 Amortizing a Loan Example

End of Payment Interest Principal Ending

Year Balance
0 --- --- --- Rs10,000
1 Rs. 2,774 Rs.1,200 Rs.1,574 8,426
2 2,774 1,011 1,763 6,663
3 2,774 800 1,974 4,689
4 2,774 563 2,211 2,478
5 2,775 297 2,478 0
Rs13,871 Rs3,871 Rs10,000
[Last Payment Slightly Higher Due to Rounding]
4-14
 Summary
• Impact of Frequency in PV and PVA
• Finding i and n in TMV problems
• Amortizing a Loan
• Loan Amortization Schedule

4-15