1 - Time Value of Money (Equations)

Question 1

Interest Rate (r)

Answer 1

Interest Rate (r) = 
Real risk-free interest rate + Inflation premium + Default risk premium + Liquidity premium + Maturity premium

Question 2

Future value

Answer 2

where r is the stated interest rate per period and N is the number of compounding periods

Question 3

Non-Annual Compounding (Future Value)

Answer 3

where rs is the stated annual interest rate, m is the number of compounding periods per year, and N now stands for the number of years. Note the compatibility here between the interest rate used, rs/m, and the number of compounding periods, mN. The periodic rate, rs/m, is the stated annual interest rate divided by the number of compounding periods per year. The number of compounding periods, mN, is the number of compounding periods in one year multiplied by the number of years. The periodic rate, rs/m, and the number of compounding periods, mN, must be compatible.

Question 4

Future Value of a sum in N years with continuous compounding

Answer 4

Question 5

EAR with continuous/discrete compounding

Answer 5

Question 6

EAR with continuous compounding

Answer 6

Question 7

Future Value - General annuity

Answer 7

Question 8

Present Value

Answer 8

Question 9

Non-annual compounding (Present Value)

Answer 9

m = number of compounding periods per year

rs = quoted annual interest rate
N = number of years

Question 10

Present Value of a Series of Equal Cash Flows

Answer 10

A = the annuity amount
r = the interest rate per period corresponding to the frequency of annuity

payments (for example, annual, quarterly, or monthly) N = the number of annuity payments

Question 11

Ordinary annuity is called a perpetuity (a perpetual annuity)

Answer 11

Question 12

Present value of a perpetuity

Answer 12

Question 13

Interest rate can also be considered a growth rate

Answer 13