Chapter 4 - Chapter 4 Assignment 1 Compounding the one...

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Chapter 4 Assignment 1 Compounding – the one period case Discounting – the one period case Compounding beyond one year Discounting beyond one year Compounding more rapidly than once a year Annual percentage rate vs. effective annual yield Continuous compounding Multiperiod valuation Short cuts for multiperiod valuation: Perpetuity Growing perpetuity Annuity Growing annuity Examples Pension fund and Mortgage 4.1 – The One Period Case Compound Value = Future Value Present Value = Future Value/(1+Interest Rate) = C 1 /1+r R = rate of return/discount rate Net Present Value (NPV) = PV in future – Cost today Cost = current PV of item 4.2 – The Multiperiod Case Compounding = earning interest on money over several interest earning periods Simple interest = nr Interest on interest = r n N is some coefficient, but usually it’s T, time Compound interest = each interest payment is reinvested FV = C 0 +(1+r) T Discounting = the process of deriving the PV of a future cash flow Present Value factor

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