FINM1001 Lecture Notes - Lecture 4: Interest Rate, Cash Flow, Dont
FINM1001 Week 2 Lecture A
● Time Value of Money: Financial Maths
○ Future value -> is the value of a cash flow at some point in the future
○ Present Value -> value of a future cash flow in today’s dollars
○ Two types of interest:
■ Simple: Constant interest
■ Compound: Interest on top of interest
○ Single cash flows:
■ Present value: FV/(1+r)^n
■ Future value: f(1+r)^n
○ Multiple cash flows:
■ Future value of cash flows of different values or are not evenly
spaced in time, we consider each cash flow separately, and sun
● Annuity
○ The cash flow are all the same value
○ Cash flows are evenly spaced
○ Ordinary Annuity e.g. mortgage or some type of loan first payment doesn’t
occur until the first period
○ Annuities due e.g. rent make a payment at period 0
○ Deferred Annuity e.g. buy now pay later payments don’t start until
sometime in the future
○ Future value of ordinary annuities: FV = F[(1(r+1)n-1)/r]
● Present value of multiple cash flows
○ Formula used to calculate the present value of an annuity differs based on
the type of annuity being considered
○ Ordinary annuity: PV = F(1-(1+R)-n/R) = FA
○ Annuity Due: PV = F + F/(1+R) + F/(1+r)2 +....+ F/(1+r)n-1 = F + F(1-(1+r)-(n-
1)/r) = F + FAn-1
○ Deferred Annuity: PV= F[1-(1+R)-n/R] / (1+r)n-1
● Infinite cash flows
○ Evenly spaced
○ Same value of cash flows
○ Cash flows go forever -> perpetuities
○ Since PV = F(1-(1-r)-n/r) and let n approach infinity since a business can
stand infinitely thus Pv = F/r
● Perpetuities
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Document Summary
Future value -> is the value of a cash flow at some point in the future. Present value -> value of a future cash flow in today"s dollars. Future value of cash flows of different values or are not evenly spaced in time, we consider each cash flow separately, and sun. The cash flow are all the same value. Ordinary annuity e. g. mortgage or some type of loan first payment doesn"t occur until the first period. Annuities due e. g. rent make a payment at period 0. Deferred annuity e. g. buy now pay later payments don"t start until sometime in the future. Future value of ordinary annuities: fv = f[(1(r+1)n-1)/r] Formula used to calculate the present value of an annuity differs based on the type of annuity being considered. Ordinary annuity: pv = f(1-(1+r)-n/r) = fa. Annuity due: pv = f + f/(1+r) + f/(1+r)2 ++ f/(1+r)n-1 = f + f(1-(1+r)-(n-