Rohan Bajaj Met Finance Manager

I wish to understand
“HOW” should I take all
For that, you must learn two things:
1. Time value of money 2. Risk and Return
financial decisions with FM principles
 Let’s learn our first concept,
Time Value of Money
What you do with
money?
 Save in Piggy Bank

Same amount of money

Invest in Bank

Inc. amount
(Interest)

No money!!

Purchase goods now

So, value of money Varies with Time!!
• The investments provide increased amount of money with time: Due
to Interest Rate
• The consumption provide present satisfaction but in future prices
may increase: Due to Inflation
• Net effect is in future money must grow because
• I have made sacrifice of present consumption (give me some benefit for
that) • I want to purchase some goods in future (my paying capacity should be
maintained)
• So money must grow at the rate of:

Nominal Interest rate = Real Interest rate + Inflation

How will I know present
worth of future money I
am going to get
 That’s easy…Money
grows at compound
interest rate

�������������� ����������

=������������ ����������
(1 + ��)��

r= interest rate (real) or interest rate

(nominal)
or inflation rate [Annualized]
n= number of years
 Let’
s solve some complications
Lump sum amount
 T=0 T=1 T=2 T=3 T=4

�������������� ����������

=������������ ����������
(1 + ��)��

������������ ���������� =
�������������� ���������� (1 +
��)��

Activity
• I have deposited Rs 5000 as Fixed deposit in the bank for five years.
 Bank has offered me 8% p.a. rate of interest. How much amount I will
receive at the end of five years if I have chosen the option of
accumulated interest FD?

• An investment broker offered me an investment scheme where I need

to invest Rs 10,000 and I will receive Rs 17,000 at the end of five years.
He said that by this I can get a whooping return of minimum 20% p.a.
Suggest me should I invest in this?
Annuity amount

T=0 T=1 T=2 T=3 T=4 PV=

 1−1
��[

(1+��)��

��]
Annuity amount

T=0 T=1 T=2 T=3 T=4

FV=
 (1+��)��
��[ −1

��]
Annuity Due amount (payment at
the beginning of period)

T=0 T=1 T=2 T=3 T=4 PV= ��(1

1−1
+ ��) [
 (1+��)��

��]
Annuity Due amount (payment at
the beginning of period)

T=0 T=1 T=2 T=3 T=4

I sta FV= ��(1 + ��)

(1+��)��
[ −1
 ��]

Activity
• red a recurring deposit in the bank. I will deposit Rs 20,000 every month for the next five
years. Bank has offered me 5% p.a. rate of interest. I have decided for accumulated
interest RD. How much amount I will receive at the end of five years?

• I need to pay college fee of Rs 2,00,000 every semester for next two years. How much
amount should I keep aside in the bank so that I am comfortable in paying my fee? Bank is
offering an interest rate of 6% p.a.

• I have taken a home loan of Rs 25,00,000 at the interest rate of 12% which I need to repay
in next 15 years? How much will be my EMI?

• In all these cases, I will be depositing or paying the amount the end of month/period. Does
it make any difference if I need to at the beginning of the month/period as the usual
requirement of bank?

Growing Annuity amount

T=0 T=1 T=2 T=3 T=4 PV=

1−(1+��)
��[ ��

(1+��)��
 ��−��]
Growing Annuity amount

T=0 T=1 T=2 T=3 T=4

FV=
(1+��)�� ��
��[ −(1+��)

��−��]
 Perpetuity: Special Case of Annuity

T=3--------------
T=0 T=1 T=2 T=∞ --------------

Present Value of Perpetuity

��
PV= ��
��
Present Value of Growing Perpetuity PV= ��−��
Activity
• I have chosen to invest in a pension fund plan where my first year deposit
will be Rs 30,000. I am assuming an annual hike in my salary of minimum
10% so I can increase the contribution in my pension fund at the same
rate. Pension fund is offering me a rate of return of 15% p.a. How much
amount I will receive at the end of 30 years?

• My father is 65 years old and retired very recently. He asked me to look for
a pension scheme for him so that he keep getting Rs 30,000 per month for
monthly expenses. He is assuming that he will celebrate his 90 th birthday
with me!! How much amount he should invest now so that he can live with
financial independence? A Pension fund scheme is offering minimum 12%
rate of interest p.a.
Compounding Frequency
When compounding frequency is not annual
N = n*m [Time periods]
 R= r/m [rate of interest]
m= 1 (annual), 2(semi-annual), 4(quarterly), 12(monthly)

When compounding frequency is not annual

�� ��
Effective interest rate =(1 + ��) -1
Practice Questions
• Berley and Myers: Chapter 2, Questions: 1-20
• Case study