FinMath - Financial Math on Spreadsheet and Calculator Kent...

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0 Financial Math on Spreadsheet and Calculator Kent L. Womack and Andrew Brownell Tuck School of Business Dartmouth College © 2003 Kent L. Womack and Andrew Brownell
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1 Financial Math on Spreadsheet and Calculator Table of Contents INTRODUCTION . ...................................................................................................................................... 1 PERFORMING TVM CALCULATIONS—THE GENERAL FRAMEWORK. .................................. 2 COMPOUNDING MULTIPLE TIMES PER YEAR. .............................................................................. 4 CALCULATING THE INTEREST RATE (OR, DISCOUNT RATE) . ................................................. 7 CALCULATING THE FUTURE VALUE OF AN ANNUITY. .............................................................. 8 CALCULATING THE PRESENT VALUE OF AN ANNUITY. ............................................................ 9 CALCULATING THE PRESENT VALUE OF A PERPETUITY. ...................................................... 10 CALCULATING THE PRESENT VALUE OF A GROWING PERPETUITY . ................................ 11 ADVANCED APPLICATION: PRICING BONDS . .............................................................................. 14
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1 Financial Math on Spreadsheet and Calculator Note: This introduction to financial math calculations was written by Professor Kent Womack and Andrew Brownell T’00. It has been edited and updated for use with the TI-BA II Plus calculator by Professor Lu Zheng. It is designed for students needing to learn the basics of compound interest and present value calculations. It presupposes a basic understanding of spreadsheet input, output, and functions. For students with calculators other than the TI-BA II Plus, it should not be difficult to translate the steps to different calculators that have embedded financial functions. Corrections or suggestions for clarifying this document will be greatly appreciated and should be sent to luzheng@umich.edu. Introduction This document will introduce you to basic financial concepts and help get you started solving finance-related problems. Concepts are introduced along with example problems. Our goal is to make you comfortable understanding the concepts as well as the calculations for basic financial problems. To that end, each example problem has a step-by-step solution for both calculator and spreadsheet. The underlying equation is also provided to help you understand the mathematics behind the calculator and spreadsheet functions. These problems are generally known as Time Value of Money problems, or TVM. As the name implies, TVM problems look at how the value of money changes over time. In your own experience, you know that inflation erodes the value of money over time and that if you invest money in a bank or CD today, it will be worth more in nominal terms in a year. But other factors, most notably risk, also change the value of money over time. TVM concepts are omnipresent in the financial markets to price bonds as well as to value companies. TVM problems use fairly standard nomenclature. But, as with many mathematical expressions, different sources (such as textbooks, calculator and spreadsheet manuals) may use slightly different notations to convey the same concept. We will use the following abbreviations throughout this document: Notation Concept What it means PV Present Value How much an investment is worth today FV Future Value How much an investment is promised to be worth or pay at a specified future date I/Y Interest Rate or Discount Rate expressed as a percentage per year . Also called Nominal interest rate .
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FinMath - Financial Math on Spreadsheet and Calculator Kent...

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