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1. Time Value Of Money Notes

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This is an extract of our 1. Time Value Of Money document, which we sell as part of our Corporate Finance Notes collection written by the top tier of University Of London (examined By LSE) students.

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Time Value of Money
Present-value Calculations and Valuation of Physical Investment Projects
Time Value of Money
Abbreviations
P = Principle
R = Interest Rate
PV = Present Value
FV = Future Value
T = Number of Periods
N = Number of Payments in Each Period e = exponential
Compound Interest: FV = P x (1 + R / N) T x N
Continuous Compound Interest: FV = P x e R x T
Simple Interest: FV = P x R x N
Discounting: PV = FV / (1 + R)T
Continuous Discounting: PV = FV x e - R x T
Cash Flow Patterns
Abbreviations
PV = Present Value
YTM = Yield to Maturity
FaV = Face Value = Bond Principle
Zero-coupon Bond: PV = FaV / (1 + YTM)T
Abbreviation
C = Annual Coupon Payment
Coupon Bond: PV = C / (1 + YTM)1 + C / (1 + YTM)2 + … + (C + P) / (1 + YTM)T

1 Abbreviations
D = Dividend
G = Growth Rate
P = Stock Price
C = Coupon Payment
R = Interest Rate
Perpetuity: PV = C / YTM
Perpetuity with Growth

Gordon Growth Model

PV = C1 / (R - G)

P0 = (P1 + D1) / (1 + R)

FV1 = C2 / (R - G)

or

FV2 = C3 / (R - G)

P0 = D1 / (1 + R) + D2 / (1+ R)2 + …

FVN = CN+1 / (R - G)

or
P0 = D1 / (R - G)

Present Value of Annuity (Mortgage)
Abbreviations
AB = Amount Borrowed at the Beginning
MR = Monthly Repayment

AB = MR x {

1 - [1 / (1 + R)T]
R

}

Future Value of Annuity (Sinking Fund)
Abbreviations
AR = Amount Received in the End
MP = Monthly Payment

AR = MP x [

(1 + R)T - 1
R

]

2

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