Julio Sarmiento-Sabogal

Tutorial 1.
The basic equation:
FV =PV (1+ r) n
FV: Future Value
PV: Present Value
r: Interest Rate
N: Number of periods

Use this equation ONLY when you are working with a single cash flow at the
very end of the period.
The equation has 4 factors, You need AT LEAST 3 factors to solve any
problem!!!.
Sometimes the problem misses one factor. You can suppose it but the result
shouldnt change.

Possible solutions:
PV =

FV
n
(1+r )

FV
PV

1 /n

( )

i=

(FV in MS Excel)

(rate)

n=

log(FV /PV )
log(1+ r )

(nper)
Pr. 16
When dealing with multiple cash flows: Payments (PMT)
Equal finite PMTs
Unequal finite PMTs
Perpetuities

For finite Cash flows:

or

r(1+r )
PMT =PV
(1+ r )n1

PMT =FV

i
n
(1+r ) 1

starting from PV

starting from FV

Apply these formulas only when all payments are equal. Otherwise you have
to calculate all cash flows separately.
Periods of PMTs and rate should match. If the rate expressed in a different
period of time, you have to calculate the proper rate BEFORE use this
formula.

Payments are at the END of the period. Rent payments for example, are
usually at the begging of the period.

Some solutions:
PV =

PMT
1
1
n
r
(1+r )

log
n=

PMT
PMT PVr
log(1+r )

Pr. 34, 39
For perpetuities:

PMT =PVr

Pr. 50
Nominal Vs. Effective Rates
Effective rate:

r eff = 1+

r nom n
1
n

Nominal rate:

r nom =( 1+r eff )1/ n1

reff = Effective rate

rnom = Nominal rate
n = Number of periods PER YEAR!!!

There are multiple solutions to sort out these problems.

You CANNOT apply nominal rates in calculations.
Multiplying an effective rate produces a nominal rate.
You CANNOT divide an effective rate

Pr. 18, 22
Amortization Schedule
Pmt
No

PMT

from formula

from formula

Intere
sts
Initial
Bal. x r
OBt-1 x
r

Principal

Outstanding balance
after PMT (OB)

Starting debt Interests

Starting debt - Principal

OBt-1 Interests

OBt-1 - Principal

OBt-1 Interests

OBt-1 - Principal

OBt-1 Interests

..
n-1

from formula

from formula

OBt-1 x
r
OBt-1 x
r