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Simple Interest
Interest amount = P × i × n
Compound Interest
Using
Writingthe
in aFuture Value way,
more efficient of $1we
Table,
can saywe. .find
..
the factor for 6% and 3 periods is 1.19102.
So, we can solve=our
$1,191.02 problem
$1,000 like this.
× [1.06] 3
..
Periods
n
FV = PV (1 + i)
FV
PV = n
(1 + i)
Slide 8
i = .08, n = 5
Present Value Factor = .68058
FV = PV (1 + i)n Number
of Compounding
Future Present Interest Periods
Value Value Rate
Monetary Monetary
Assets Liabilities
No Explicit Interest
Some notes do not include a stated
interest rate. We call these notes
noninterest-bearing notes.
The objective of
valuing an asset or
liability using Expected Cash Flow
present value is to Credit-Adjusted Risk-Free
approximate the fair × Rate of Interest
value of that asset Present Value
or liability.
Slide 15
Basic Annuities
Ordinary Annuity
An annuity with payments at the end of the
period is known as an ordinary annuity.
Today 1 2 3 4
End of year 1
End of year 2
End of year 3
End of year 4
Slide 17
Annuity Due
An annuity with payments at the beginning of
the period is known as an annuity due.
Today 1 2 3 4
Beginning
of year 1
Beginning
of year 2
Beginning
of year 3 Beginning
of year 4
Slide 18
Today 1 2 3 4
PV1
PV2
PV3
PV4
Slide 24
The number of
The interest rate
periods
Long-term Long-term
Bonds Leases
Pension
Obligations
Slide 36
Table Present
Cash Flow Table Value Amount Value
PV of $1
Face value of the bond n=10; i=6% 0.5584 $ 1,000,000 $ 558,400
PV of
Ordinary
Interest (annuity)
Annuity of $1
n=10; i=6% 7.3601 50,000 368,005
Price of bonds $ 926,405
Slide 37
Certain long-term
leases require the
recording of an asset
and corresponding
liability at the present
value of future lease
payments.
Slide 38