{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

FIN504_PowerPoint_Slides_04

# FIN504_PowerPoint_Slides_04 - FIN 504 Financial Management...

This preview shows pages 1–16. Sign up to view the full content.

FIN 504: Financial Management Lecture 4: Time Value of Money II

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 FIN 504: Financial Management Time Value of Money II Time Lines Annuities Perpetuities
3 FIN 504: Financial Management Time Lines The Use of Time Lines Temporal Indices: t T 1, 2, 3,… 0 1 2 3 4 5 T 6 C 0 C 1 C 2 C 4 C 3 C 5 C 6 C T

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Annuities
5 FIN 504: Financial Management Annuities Annuities A finite series of constant cash flows, e.g., \$100 per year for 5 years \$10 per month for 7 months Variables Cash Flow Amount The Date of the First Payment The Period (weekly, quarterly, annually) The Length (or Number) of Payments

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
6 FIN 504: Financial Management Annuities A 5 year annual, annuity of \$500 beginning in year 1: TECHNICAL NOTE: When we use the term ‘annuity’ we mean an ‘annuity in arrears’, i.e., an annuity whose first payment begins next (not this) period. An annuity that begins this period is called an ‘annuity due’ and will be considered toward the end of the lecture. 0 1 2 3 4 5 6 0 50 50 50 50 50 0
7 FIN 504: Financial Management Annuities Annuities can always be valued as a series of one time cash flow (r = 7%): 0 1 2 3 4 5 6 0 50 50 50 50 50 0 2 3 4 5 50 50 50 50 50 \$205.01 1.07 1.07 1.07 1.07 1.07 + + + + =

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8 FIN 504: Financial Management Annuities But there is a general present value formula that is often more convenient: NOTE: The formula assumes that the first payment begins next period! ( 29 1 1 1 Annuity t C PV r r = - +
9 FIN 504: Financial Management Annuities Thus: ( 29 5 50 1 1 \$205.01 0.07 1.07 Annuity PV = - = 0 1 2 3 4 5 6 0 50 50 50 50 50 0

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10 FIN 504: Financial Management Annuities And there is a general future value formula : NOTE: The formula assumes that the first payment begins next period and it give the future value in year T! ( 29 ( 29 1 1 t Annuity C FV r r = + -
11 FIN 504: Financial Management Annuities Thus: 0 1 2 3 4 5 6 0 50 50 50 50 50 0 ( 29 ( 29 5 50 1.07 1 \$287.54 .07 Annuity FV = - =

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
12 FIN 504: Financial Management Annuities We can check our calculations to make sure that the future value of the annuity (properly discounted) gives its present value: 5 287.54 \$205.01 (1.07) =
Delayed Annuities

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
14 FIN 504: Financial Management Delayed Annuities Annuities may not begin in the next period. What if the annuity begins in two or three years, not next year. I call these ‘delayed annuities’. If the cash flow begins in year 2, the annuity formula will calculate the value in year 1. So to get the present value, we need to discount everything one more year.
15 FIN 504: Financial Management Delayed Annuities In general, for year the annuity is delayed, we need to discount the result by one additional year.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 49

FIN504_PowerPoint_Slides_04 - FIN 504 Financial Management...

This preview shows document pages 1 - 16. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online