FUTURE VALUE

Future Value (FV) if an investment today

1000
(PV)

2
n

Future Value
1
i = interest = 8%

5
(Compunding) slove problem in future

Present Value
PV = $10000

FVs = PV (1 + i) n

Annually

n=6
5

= 1000 (1 + 0.08) = 1469.33 (Annually)

interest = 6%
10000 (1 + 0.06)6 = 14185.19

PV = 1000
n = 5 x 2 = 10
i= 8% - 4% = 4%

PV = $10000
n = 6 x 2 = 12
I = 6%-3% = 3%

1000 (1 + 0.04)10 = 1,480.24

10000 (1 + 0.03)12 = 14,257.60

PV = 1000
n = 5 x 4 = 20
i= 8% - 6% = 2%

PV = $10000
n = 6 x 4 = 24
I = 6% /4 = 0.015

1000 (1 + 0.02)20 = 1,485.95

10000 (1 + 0.015)24 = 14295.03

PV = 1000
n = 5 x 12 = 60
i= 8% /12 = 0.067)

PV = $10000
n = 6 x 12 = 72
I = 6% /12 = 0.005

1000 (1 + 0.0067)60 = 1,492.81

10000 (1 + 0.005)72 = 14320.44

Half Yearly

Quarterly

Monthly

FINDING PRESENT VALUE

If you are expecting to receive $10000 in 5 years, how much is it worth today if rate of interest
is 8%, discounted annually

0
(PV)

2
n=5

5
10000 (Future value)

n=5
i = 8%
1

PV = FV

Annually

(1 + i)
10000
5

(1.08)

= 6805.83

PV = FV

Half Yearly

(1 + i)n
10000
(1.04)10 = 6755.64

PV = FV

Quarterly

(1 + i)n
10000
(1.02)20 = 6729.71

PV = FV
n

(1 + i)
10000
(1.0067)60 = 6698.78

Monthly

ORDINARY ANNUITY
Equal amount of payments over equal time periods the first payment occuring 1 period from now.

1000
0
(PV)
1

1000

1000

Annual
1000

1000

1000

2
n=5

3
i=8%

1000

Ordinary annuity

5
10000 (Future value)

(1 + 0.08)5 - 1
0.08
5866.6

Annually

(1 + 0.04)10 - 1
0.04

Half Yearly

= 12,006.11

1000

(1 + 0.02)20 - 1
0.02

Quarterly

= 24,297.37

1000

(1 + 0.0067)60 - 1
0.067
= 21,325.66

Pmt = 100

n=7

I = 8%

1.08 n 7 divide 0.08 x 100 = 892.28

Monthly

PRESENT VALUE OF AN ANNUITY

PVA =Pmt

1-

1
n

(1 + i)
i

1
(1.08)5
0.08
1.08 n5 = x1 = -1 = divide 0.08 = x 1000 =
= 3,992.71
1000

1-

Loan Calculation
500 - X(2)
500
X
2
50,000 Loan

50000

8% interest

1-

5 years

1
(1.0067)60
0.0067

= 49271 divide 50000 = 0.99

20000 Loan

20000

6% interest

1-

1
(1.005)12

1 years

0.005
=116189 divide 20,000 = 1,721.33
To calculate interest = 20000 x 0.005 = 100
then the next you calculate 18379 x 0.005 = 92
Loan Balance

20000
18379
16750
15113
13468
11815
10154
8485
6808
5123
3430
1729

Repayment

1721
1721
1721
1721
1721
1721
1721
1721
1721
1721
1721
1721

Interest

Principle

100
92
84
76
68
60
52
44
36
28
20
12

1621
1629
1637
1645
1653
1661
1669
1677
1685
1693
1701
1709

Loan Balance

18379
16750
15113
13468
11815
10154
8485
6808
5123
3430
1729
20

HIRE PURCHASE
Car Loan = 20000
Interest 6%
Repayment 1 year
To calculate interest = 20000 x 0.005 = 100
1200
21200
Loan Balance

divide 12

Repayment

20000
18333
16666

= 1766

Interest

1767
1767
1767

Principle

100
100
100

Loan Balance

1667
1667
1667

18333
16666
14999

PERPETUITY -means no ending. Forever

1000 month / pension
Interest rate 12%
1000 for 3 years at 8%
1000

1000
1

1000
2

(1.08)

(1.08)

(1.08)3

Pmt
1

100,000

(perpetuity)

BONDS - LIABILITY UNDER BONDS

1
2
3
4
5

Coupon rate - rate of interest

Maturity Period
Market Rate / Yeild to maturity
Price
Par Value - 1000
Par * coupon rate
Annuity

1000
80

PV = Pmt

1-

80

80
9%

80

x 80 =

259.18

1
(1.09)4
0.09

+
1080
(1.09)5

701.92
961.1

80

1
2
3
4
5

Coupon rate - rate of interest 6%

Maturity Period - 7 years
Market Rate / Yeild to maturity - 7%
Price
Par Value - 1000
Par * coupon rate
1000
60

60

60

60
0.07

Par value 1000 + Coupon rate

1000 x 0.06 = 60
1-

1
7

(1.07)
0.07

x 60 =

323.35
+

1000
(1.07)6

666
989.35

60

60

60

Sunflower Corporation has 2000 bonds issued and outstanding. The bonds have a par value of
1,000. The bonds were issued at a coupon rate of 6.0% and they pay interest semi-annually.
The bonds were issued on 3rd March 2011 and they mature in 10 years. At the time of issue, the
market rate of interest was 7%.
1 Bond is an example of a financial instrument. What kind of financial instrument is this?
Debt Financial Instrument
2 What is the advantage of issuing bonds to raise capital?

The interest rate on bond debt is tax deductible. This is a hugh advantage of issuing bonds.
Technically, firms do not have to pay dividends on capital stock, since they can use the
extra cash to expand.
3 What you understand by coupon rate?
It is a rate of interest promise by the bond issuer or the borrower or the company
The interest rate stated on a bond, note or other fixed income security, expressed as a
percentage of the principal (face value). also called coupon yield.
4 In the above case, how much interest in total will the firm pay every six months?
Every six months they will pay 30 (1000 x 0.03 = 30)
5 Based on the above information, what would have been the issue price per bond and explain
why?
Coupon rate is lower than market rate, the bond will seel at the discount
1
=

1
(1.035

)20

426.37