Financial Markets

Module #3

Time Value
of Money
Charlsgodwin C. Tanola, CPA
Interest rate = 10%
Future value - Lump sum

FV = Future value
PV = Present value
N = No. of periods
I = Interest rate per period
PMT = Payment
Future Value - Ordinary annuity

Future Value - Annuity Due

Future value - Uneven cash flow
Present Value - Lump sum
FV = Future value
PV = Present value
N = No. of periods
I = Interest rate per period
PMT = Payment
Present Value - Ordinary annuity

Present Value - Annuity Due

Perpetuities

Uneven cash flow

 Financial Markets

Module #4

Time Value of
Money (Part 2)

Charlsgodwin C. Tanola, CPA

Classification of Interest Rates
• Nominal rate (I NOM ): also called the quoted or stated rate. An annual rate that ignores compounding
effects. INOM is stated in contracts. Periods must also be given, e.g. 4% quarterly or 4% daily interest.

• Periodic rate (I PER ): amount of interest charged each period, e.g. monthly or quarterly.
 I PER = I NOM /M, where M is the number of compounding periods per year. M = 4 for quarterly and
M = 12 for monthly compounding.

• Effective (or equivalent) annual rate (EAR = EFF%): the annual rate of interest actually being earned,
considering compounding.
 Should be indifferent between receiving 4.04% annual interest and receiving 4% interest,
compounded semiannually.
 Financial Markets

Module #5 and #6

Risk and Rates of

Return

Charlsgodwin C. Tanola, CPA

What four factors affect the level of interest rates?
• Production opportunities
• Time preferences for consumption
• Risk
• Expected inflation
 Financial Markets

Module #7

Long-term
Financing: Debts

Charlsgodwin C. Tanola, CPA

• TREASURY BONDS
• CORPORATE BONDS
• MUNICIPAL BONDS
• FOREIGN BONDS
Thank
you!