To calculate

payment at
beginning press
BGN key

Perpetuity - constant stream w/o end

Loan amortization Continuous compounding

Perpetuity at beginning of period

Interest rate and inflation

Growing perpetuity, indefinite growth

This assumes the cash Amortization: loan paid in equal
flows start at year 2 installments, single lump sum, or
combination
growing perp, cash flow at time 0

Annuity (lease/mortgage): Changing T will give value at end of each

Delayed annuity
Future value of annuity:
period. Eg 10 year loan, value after 2 years,
N=8
Finding ballon payment:
Find monthly payments based on length of loan
(in months, not years)
Use PMT to find PV (T=months left)
Profitability index
CASH FLOWS

Annuity at time 0

For EAC (equivalent annual cost)

Step 1: Find PV of overall cost

(PV at time 0 = CF)

Growing annuity +CF (time zero)

Step 2: find EAC

Growing annuity at time 0

If first payment is due right away,

can be called annuity due
Effective annual rate:

Future value with APR

EAR: interest rate with compounding

APR: annual interest rate without compounding.
AKA stated or quoted rate

From EAR —> APR

 Examples:

Cash Flows

(Sales-cost-depreciation)*(1-tax rate) =NI

Add back depreciation (not “true” cash flow)

Take NPV of the resulting cash flow

Capital Gains
Market value net of taxes = (MV-BV)(1-Tax rate)+BV
Also called the after tax salvage value
Bonds Different types of bonds:

Index Adjusted Bonds (e.g. TIPS)

Callable Bonds - call provisions allowing the issuer to repurchase the bond at a specified call price (can buy
back if interest rate drops)
Puttable Bonds - put provisions allowing the holder to demand early repayment of the principle (holder can
demand re-payment)
Convertible Bonds - A convertible bond is an instrument giving the bondholder equity the right to exchange
the bond for a specified number of shares of equity. Bonds → stocks
Floating rate Bonds – based on interest rate in the market, not a fixed rate
International Bonds: Foreign Bonds (foreign issuer in local currency) eg Samurai
Yen bonds sold by a foreign issuer in Japan) and Euro Bonds (foreign currency e.g., $ bonds sold in London)

If YTM = coupon rate bond sells at PAR

YTM > coupon rate sells at DISCOUNT
YTM<coupon rate sells at PREMIUM

Pricing Zero coupon bonds:

Pricing semi-annual bonds

 Question
2,3,6,8,10