1.

Time Value of Money

Part A – Main Concepts

Time Value of Money, Risk and
Return – Main concepts
1. Compounding and Discounting:
Future and Present Values
2. Annuities and Perpetuities
3. Annual Percentage Rates (APR),
Annual Equivalent Rates (AER)
and “All-In” Rates
4. Amortization Tables
Time Value of Money

•Many financial decisions involve the comparison between cash flows that are
situated at different moments in time

•Investments in securities (financial assets)

•Capital expenditures (real assets)

•Loans

3
Time Value of Money

•1 Euro today has not the same value today as 1 Euro due a year from now (or even
tomorrow)

•Reason:

•Opportunity cost that could be earned with that amount between today and a future date, or
the “Time value of money”

4
Time Value of Money

5
Time Value of Money

•To provide a meaningful comparison between cash-flows that are located at

different moments in time one has to consider (for instance, an investment at time
0 and a cash receipt at time t):

•The expected return (what we stand to earn if we wait a while before receiving – at time t - a
certain amount of money)

•The corresponding risk (the possibility that we may lose part or all of our investment made at
time 0)

•…Risk and return are intrinsically related!

6
Risk and Return

7
Future Value: Risk versus Return

•(Real case) In the period 1926-2010, the mean rates of return in the US for a
number of different assets were as follows:

(Source:Ibbotson Associates)

8
Risk and Return

9
Basic Concepts of Time Value of Money

▪Future Value

▪Present Value

▪Future Value of a Constant Periodic Payment (or Annuity if the period is a year)

▪Present Value of a Constant Periodic Payment (or Annuity if the period is a year)

10
Future Value

•What is the Future Value of 100 Euros in 2 years’ time?

•If interest is compounded yearly (i.e., is computed, but not paid, every year, and
unpaid interest also earns an interest rate) and the interest rate is 10%, then

FVt = Future Value at time t

i = interest rate
PV0 = Initial sum of money (" present value of a sum" ) at time 0
FVt = PV0 (1 + i ) t
FV2 = 100  (1 + 10%) 2 = 121

•Note that 21 = 10  (1 + 10%) + 10

11
Future Value

•Different forms of computing Future Values:

•Compound interest system
•Earned Interest is not paid periodically (only at the end of the contract) and so unpaid interest
earns an interest:

FVn = PV0 (1 + i ) n
•Linear interest system
•Earned Interest is not paid periodically (only at the end of the contract, however unpaid interest
earns no interest

FVn' = PV0 (1 + n.i )

•Simple interest system

•Earned Interest is paid periodically (and not only at the end of the contract), so interest does
not (and should not) earn an interest

12
Future Value

(Based on a real case)

• Suppose that an international financial institution, at a times of high interest rates,

cannot concede loans with interest rates below a threshold of 16% on “bullet”
loans that will be paid in 7 years time with a simgle payment (interest and
principal) at maturity.

• How much would the corresponding compounded interest rate be reduced if

interest were to be computed under a linear capitalization system?

| 13
Future Value

• Answer:

(1 + i )7 = (1 + 16%  7)
7 1
( )
(1 + i ) = (1 + 16%  7)
7 7

1
( )
i = (1 + 16%  7) − 1 = 11.33%
7

(thus, less 4.7 percentage points relative to an interest rate of 16%!!)

| 14
Future Value

•If the Native American tribe that accepted goods worth 60 guilders for the sale of
Manhattan in 1626 had invested the money in a Dutch bank at 6.5% interest,
compounded annually, then in 2005 their investment would be worth over €700
billion (around USD1 trillion), more than the assessed value of the real estate in all
five boroughs of New York City.

•With a 6.0% interest however, the value of their investment today would have been
€100 billion (1/7th as much!).

•Home Exercise: check how many guilders that would be in 2005 and confirm that a drop in
interest rate from 6.5% to 6.0% would have such an impact

15
Future Value

Year 6,50% 6%
1626 60,00 60,00
2005 1.392.042.827.692,96 233.923.679.052,78
Comparison 100,0% 16,8%
Accumul. Return 2320071379388% 389872798321%

16
Future Value

17
Future Value

18
Future Value

•Question:

A. In 01.09.2013 the S&P500 index had a value of 1805.81. In 01.09.2023 that value
was 4515.77. How much was

(i) the accumulated percentage return for an investor that during that
period (10 years) would have kept a portfolio of stocks that was able to replicate
the composition of such índex?

(ii) How much was the compounded annual return for such investor?

| 19
Future Value

•Question:

B. In 01.09.1953 the S&P500 índex had a value of 18.55. In 01.09.2023 that value
was 4515.77. How much was

(i) the accumulated percentage return for an investor that during that
period (70 years) would have kept a portfolio of stocks that was able to replicate
the composition of such índex?

(ii) How much was the compounded annual return for such investor?

| 20
Future Value

•Answers:

4515.77
•A) (i) − 1 = 150.07%
1805.81
1
 4515.77 
10
 − 1 = 9.60%
(ii)

 1805.81 
4515.77
•B) (i) − 1 = 24243.77%
18.55
1
(ii)  4515.77 
70
  − 1 = 8.17%
 18.55  | 21
Future Value

22
Future Value

•Question:

C) In 01.09.2013 the PSI20 Total Return Index had a value of 11741.54 In

01.09.2023 that value was 17361.39. (Source: https://pt.investing.com/indices/psi-
20-total-return-historical-data )
How much was:
(i) the accumulated percentage return for an investor that during that
period (10 years) would have kept a portfolio of stocks that was able to replicate
the composition of such index?
(ii) How much was the compounded annual return for such investor?

•D) What is the Future Value of 100 000 euros invested in the last 10 years in either
the S&P500 or the PSI20 TR Indexes?
| 23
Future Value

•Answers:

17361.39
•C) (i) − 1 = 47.86%
11741.54
1
(ii)  17361.39  10
  − 1 = 3.99%
 11741.54 
•D) FVPSI 20 = 100 000 (1 + 3.99%)10 = 147862.97
FVS & P 500 = 100 000 (1 + 9.60%)10 = 250068.94
(note: the US Dollar increased in value relative to the Euro by a total of +23.7% in the last
10 years thus total gains were 11.07% /year in euros for an investor on S&P500,
accumulating therefore a total amount of 309295.80 euros vs 147862.97, ie more than 2
times (2.09x) the amount received from the investment on PSI20 TR! e| 24
Future Value

•Answers (spreadsheet calculations):

Index 01/09/1950 01/09/2013 01/09/2023
S&P500 18.55 1805.81 4515.77
PSI20 TR 11741.54 17361.39

Returns 70 years 10 years Accum. 10 years Accum. 70 years

S&P500 8.17% 9.60% 150.07% 24243.77%
PSI20 TR na 3.99% 47.86% na

Future Value 2013 2023 S&P/PSI20

S&P500 100000 250068.94
PSI20 TR 100000 147862.97 1.69

2013 2023
USD/EUR 0.76 0.94
Change 23.7%

In Euros
Returns 10 years Accum. 10 years S&P/PSI20
S&P500 11.07% 185.61%
Future Value 309295.80 2.09 e| 25
Future Value: (very) log run returns
•(Real case) In the period 1 Jan 1926- 31 Dec 2022, the mean rates of return in
the US for a number of different assets were as follows:

(Source:Ibbotson Associates)

26
Future Value

•What would be the future value in 2022 of 100 USD invested in 1st Jan 1926 until
31 Dec 2022 in each of the above assets (n=97 years)?

•And what about the average annual real return (i.e., inflation-free)?

27
Future Value

Av. Return Investment 1926 Value 2022 Gain

Small Stocks 11.80% $100.00 $4,998,675.50 $4,998,575.50
Large Stocks 10.10% $100.00 $1,130,758.71 $1,130,658.71
Government Bonds 5.20% $100.00 $13,662.39 $13,562.39
T-Bills 3.20% $100.00 $2,122.91 $2,022.91
Inflation 2.90% $100.00 $1,600.63 $1,500.63

Note that:
if
Real returns (bef. Tax) rr = Real return
Av. Return i = Inflation rate
Small Stocks 8.65% nr = Nominal return (unadjusted for inflation)
Large Stocks 7.00% then
Government Bonds 2.24% (1 + nr ) = (1 + rr )(1 + i) ("Fischer equation")
T-Bills 0.29% and thus
(1 + nr )
Inflation 2.90% rr = −1
(1 + i )
28
Future Value

| 29
Future Value

| 30
 Equity Risk Premium

•ERP –Equity Risk Premium

Equity Risk Premium
Stocks - T.Bills Stocks - T.Bonds
1928-2022 6.36% 5.06%
1973-2022 5.90% 4.12%
2013-2022 11.66% 12.32%
•Source: Damodaran Online

•Basis for determining the required rate of return (ks) for equity investors (ks)
according to the CAPM (Capital Asset Pricing Model)
•Given the average return of the equity market (kM), a riskfree rate (kF) and a measure of the relative
(  ) riskiness of a particular stock relative to the equity market as a whole (the market by definition
has a that has a  = 1 ):

kS = kF +   (kM − kF ) = kF +   ERP
| 31
Future Value

32
Future Value

•John Neff (Windsor Fund)

•Return S&P500 (1964-1994)
•Annual: 10.6%
•Accumulated: +2,229.7%

•Return Windsor Fund (1964-1994)

•Annual: 13.7%
•Accumulated: +5,546.4%
•Source: John Neff, 2001, “On Investing”, Wiley

33
Future Value

Q: if you
invested $1000
in 1965 in BH,
how much would
you have in
2022?
Compare with S&P500.

Solution:
1000 (1 + 19.8%)58 = 35 521 839.45
versus
1000 (1 + 9.9%)58 = 238707.55
34
Future Value

•If instead of trying your luck weekly in Euromillions lottery with a cost of 5 euros
per week, you were to place weekly such amounts in the stockmarket earning on
average a nominal annual rate of return of 10%, how much would you accumulate
in 25 years?

Solution:
Lotto savings
5 per week
nr years 25
i 10%

28,998.53 €

35
Future Value
GOOD INVESTING IN THE STOCK MARKET

If you only invest your money after reading

analysts´s recommendations, then you better
read this. Little Tia Roberts, 5 years of age, made
an experiment in the UK that aimed at comparing
different ways of forecasting the behaviour of the
stock market. Her companions in the experiment
were a financial astrologist, Christeen Skinner and
an independent financial analyst, Mark Goodson.
All of them held a portfolio of totalling 500 ₤. In
the twelve months ending this week, the Footsie
Index went down by -16%, the financial astrologist
lost -6.2% but little Tia Roberts’ portfolio rose by
+5.8%. If after this you still prefer to use the Mark
Goodson method to the Tia Roberts one, then it´s
because you believe in market efficiency, which
this experiment clearly disproves.

Source: Expresso

36
Future Value of Periodic Payments

•Suppose
•R= Periodic Payment (or “Rent”; or “Annuity” if payment is yearly)
•n = Number of payments (number of rents to be paid or received)
•Sn = Sum of future values of all n rents

Sn = R(1 + i ) n −1 + R(1 + i ) n − 2 + R(1 + i ) n −3 ...+

+ R(1 + i )1 + R
Or
n
Sn =  R(1 + i )
k =1
n− k

37
Future Value of Periodic Payments

•It can be shown that, if R is a constant, this is equal to

n
(1 + i ) n − 1
Sn = R  (1 + i ) n− k
=R
k =1 i

Example:
Suppose R = 1000, n = 50 years and i = 10%
What is the Future Value of all sums?
(1 + 10%) 50 − 1
S50 = 1000 = 1,163,908.53
10%

38
Present Value

•What is the amount today that we would be indifferent in comparison with the
(guaranteed) amount of 100 euros in 2 years if the risk-free interest rate is
5%/year?
FVt
PV0 = FVt (1 + i ) − t =
(1 + i ) t
100
PV0 = 100  (1 + 5%) −2 = = 90.70
(1 + 5%) 2
Note that
90.70  (1 + 5%) 2 = 100

•The amount of 90.7 is also called the discounted value of 100.

39
Present Value of Periodic Payments

PV0 = R (1 + i ) − n + R (1 + i ) − ( n −1) + R (1 + i ) − ( n − 2 ) +...+

+ R (1 + i ) −2 + R (1 + i ) −1

40
Present Value of Periodic Payments

•Suppose

•that the interest rate (called APR-Annual Percentage Rate) charged by banks on house
loans is 5%

•payments to bank are made monthly and are constant

•your monthly savings are 2000 euros

•What is the maximum 25-year house loan you can get?

5% − ( 2512 )
(1 − (1 + ) )
PV0 = 2000 12 = 342,120.09
5%
( )
12
41
Present Value of Periodic Payments

•What if the first constant payment is made at time 0 instead of time 1 (while
keeping the same total number of payments?)

•Then the previous formula will become (why?):

1 − (1 + i) − n
PV0 = R(1 + i )
i

•And, similarly the Future Value of such payments will be (why?):

(1 + i )n − 1
FVn = R(1 + i )
i

42
Present Value of Periodic Payments

•Note that is through the mechanism of periodic payments discounting that

securitization operations are structured

•i.e., an operation through which future cash-flow rights are transformed into tradable
securities that can be sold to third parties

43
Present Value of Periodic Payments

44
Present Value of Periodic Payments

45
Present Value of Periodic Payments

46
Present Value of Periodic Payments

47
Infinite Number of Payments

•Suppose an infinite number of constant payments R (constant annuity with an

infinite horizon)
•It can be shown that R
lim PV0 =
n →+ i
•If the infinite payments R are growing at a constant rate g(<i), then

R1
lim PV0 =
n →+ i−g
where R1 is the next future payment (at time 1)
(0 is the current period)

48
Infinite Number of Payments

•In general terms, the Present Value at time n of a growing perpetuity with infinite
horizon starting at n+1 will be

Rn +1
PVn =
i−g

49
Example

•Source: HGT (2008, p. 327)

50
Present Value of Growing Annuities with finite horizons

•We can also compute the value of growing annuities with finite horizons as the
difference between two infinite growing annuities, one of them starting at time 1
and another at time n+1: R
•The first perpetuity has a value, at time 0, of PV0 = 1
i−g
•The second perpetuity has a value, at time 0, of
Rn +1 1 R1 (1 + g ) n 1
PV0 =  = 
(i − g ) (1 + i ) n (i − g ) (1 + i ) n

•Therefore the difference between the two is the PV of an annuity starting at time 1 and
ending at time n:

Note: if the first annuity starts at time 0, then the formulas above must by multiplied by (1+i)
51
Example

•Please compute the Present Value at time 0 of annuity that will start in one year time
with a value of 100 euros, will grow at a rate of 10%/year and will end after 20 years. The
discount rate is 6%.

•Solution:

•Note: unlike infinite-horizon annuities, finite horizon ones can be computed even when g>i

52
 Future Value of Growing Annuities with finite horizons

• From:

• If we want to compute the Future Value at time n, we just need to multiply the
formula above by a factor of (1+i)n and therefore,

R1  (1 + g ) n 
FVn = PV0 (1 + i ) = n
1− n 
(1 + i ) n =
(i − g )  (1 + i ) 
R1
FVn = (1 + i ) n − (1 + g ) n 
(i − g )
| 53
APR versus AER

•When a Bank defines an interest rate in a particular financial contract (e.g., a

loan) it usually refers to what is called the APR (Annual Percentage Rate), or
sometimes Nominal Interest Rate (NIR) or even Annual Proportional Rate

•Periodic interest payments on a certain amount PV will then be computed on

a sub-annual form in the following way:

•For instance, if monthly interest payments:

APR
monthly interest payment = PV 
12
•In general, if a year is divided in z sub-periods for computing interest,
the periodic interest payment will be:
APR
periodic interest payment = PV 
z
54
APR versus AER

•We could, however, ask what will be the effective income of the Bank if it
periodically receives interest in a regular, sub-annual form?

•For instance, if APR=12%, PV=1000 € but interest is received on a monthly

basis, (10€/month), the Bank will get at the end of the year a total of

FV12 = 10(1 + 1%)11 + 10(1 + 1%)10 +...+10(1 + 1%)1 + 10 =

= 126.83

•Thus, the Annual Equivalent Rate (AER), sometimes called the Effective
(annual) Interest Rate (EIR) will be, from the standpoint of the Bank

126,83
Annual Equivalent Rate = AER = = 12.683%
1000

55
APR versus AER

•In a faster way, we could have computed AER as

12
 12% 
AER = 1 +  − 1 = 12.683%
 12 
•Generally speaking, if we have z sub-periods in the year for computing periodic
interest payments, we will have the following Annual Equivalent (or Effective)
Interest Rate:

z
 APR 
AER = 1 +  −1
 z 

56
APR versus AER in a continuous compounding setting

•Note that when z → +

z
 APR 
lim 1 +  = e APR
z →
 z 
•Thus, in that limit case,
AER = e APR
−1
•For example, if APR=12%, we would have, at the limit

AER = e12% −1 = 2.7182812% − 1 = 12.7497%

57
APR versus AER

Practical rules
• Proportional Rule
• From APR rates we can compute an effective interest rate (for the
period where interest is to be paid or computed) using a
proportional rule , that is
• if i(z) is the APR, being z the number of periods in the year for
computing interest (number of capitalization period)

• The effective interest rate for each capitalization period will be :

i( z)
ieffective =
z
| 58
APR versus AER

Practical rules

z Capitalization period
1 Annually
2 Semi-annually
4 Quarterly
12 Monthly
52 Weekly

| 59
 APR versus EAR

Practical rules
• Equivalence rule
• Two effective interest rates are deemed equivalent if, when
applied to a same initial amount PV0, these will provide for the
same period (ex. one year), an identical future value:

PV0 (1 + ieffect. annual ) = PV0 (1 + ieffect. semi-annual ) = PV0 (1 + ieffect. quarter ) = PV0 (1 + ieffect. month ) = ...
1 2 4 12

or
(1 + ieffect. annual ) = (1 + ieffect. semi-annual ) = (1 + ieffect. quarter ) = (1 + ieffect. month ) = ...
1 2 4 12

| 60
APR versus AER

Practical rules
• Example
➢ Annual Equivalent Rate (AER) when the Annual Percentage Rate (APR)
(or NIR-Nominal Interest rate) is 5% with semi-annual interest
compounding:
2 2

(1 + AER ) = 1 +   AER = 1 +  − 1 = 5, 06%

5% 5%
 2   2 
• Thus,an effective interest rate for a certain time period can be
transformed into an effective interest rate for a different time
period through an equivalence rule

• If z is 1 year, then the corresponding effective interest rate is the AER –

Annual Equivalent Rate
| 61
TAE versus TAN

Practical rules

APR (or NIR)

Proportional rule

Equivalence
Effective Interest rule Effective interest
Rate rate
(for period z) (for period z’)

| 62
Loan Amortization Tables

•Example:
•Value of loan: 1,000,000 €
•Annual Percentage Interest Rate (APR): 6%
•Contract period length: 9 years, quarterly payments
•Thus, the Quarterly Effective Interest Rate = 6%/4=1.5%, and therefore,

63
Loan Amortization Tables
Period Principal Due Interest Payment Principal Payment Total Payment
1 1.000.000,00 € 15.000,00 € 21.152,40 € 36.152,40 €
2 978.847,60 € 14.682,71 € 21.469,68 € 36.152,40 €
3 957.377,92 € 14.360,67 € 21.791,73 € 36.152,40 €
4 935.586,20 € 14.033,79 € 22.118,60 € 36.152,40 €
5 913.467,59 € 13.702,01 € 22.450,38 € 36.152,40 €
6 891.017,21 € 13.365,26 € 22.787,14 € 36.152,40 €
7 868.230,07 € 13.023,45 € 23.128,94 € 36.152,40 €
8 845.101,13 € 12.676,52 € 23.475,88 € 36.152,40 €
9 821.625,25 € 12.324,38 € 23.828,02 € 36.152,40 €
10 797.797,23 € 11.966,96 € 24.185,44 € 36.152,40 €
11 773.611,80 € 11.604,18 € 24.548,22 € 36.152,40 €
12 749.063,58 € 11.235,95 € 24.916,44 € 36.152,40 €
13 724.147,14 € 10.862,21 € 25.290,19 € 36.152,40 €
14 698.856,95 € 10.482,85 € 25.669,54 € 36.152,40 €
15 673.187,41 € 10.097,81 € 26.054,58 € 36.152,40 €
16 647.132,82 € 9.706,99 € 26.445,40 € 36.152,40 €
17 620.687,42 € 9.310,31 € 26.842,08 € 36.152,40 €
18 593.845,34 € 8.907,68 € 27.244,72 € 36.152,40 €
19 566.600,62 € 8.499,01 € 27.653,39 € 36.152,40 €
20 538.947,23 € 8.084,21 € 28.068,19 € 36.152,40 €
21 510.879,05 € 7.663,19 € 28.489,21 € 36.152,40 €
22 482.389,84 € 7.235,85 € 28.916,55 € 36.152,40 €
23 453.473,29 € 6.802,10 € 29.350,30 € 36.152,40 €
24 424.122,99 € 6.361,84 € 29.790,55 € 36.152,40 €
25 394.332,44 € 5.914,99 € 30.237,41 € 36.152,40 €
26 364.095,03 € 5.461,43 € 30.690,97 € 36.152,40 €
27 333.404,06 € 5.001,06 € 31.151,33 € 36.152,40 €
28 302.252,73 € 4.533,79 € 31.618,60 € 36.152,40 €
29 270.634,12 € 4.059,51 € 32.092,88 € 36.152,40 €
30 238.541,24 € 3.578,12 € 32.574,28 € 36.152,40 €
31 205.966,96 € 3.089,50 € 33.062,89 € 36.152,40 €
32 172.904,07 € 2.593,56 € 33.558,83 € 36.152,40 €
33 139.345,24 € 2.090,18 € 34.062,22 € 36.152,40 €
34 105.283,02 € 1.579,25 € 34.573,15 € 36.152,40 €
35 70.709,87 € 1.060,65 € 35.091,75 € 36.152,40 €
36 35.618,12 € 534,27 € 35.618,12 € 36.152,40 €

64
Appendix 1: Islamic Banking

•Compound interest was once regarded as the worst kind of usury, and was
severely condemned by Roman law, as well as the common laws of many other
countries

•The Qur'an explicitly mentions compound interest as a great sin, even though
Muslims all over the world have financial arrangements according to special
Islamic rules. Interest known in Arabic as "riba" (usury) is considered wrong:

“ Oh you who believe, you shall not take riba, compounded over and over.
Observe God, so that you may succeed ”
— (Qur'an 3:130)

65
Appendix 1: Islamic Banking

•Islamic banking has the same purpose as conventional banking except that it
operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat
(Islamic rules on transactions).

•The basic principle of Islamic banking is the sharing of profit and loss and the
prohibition of riba (usury).
•
•Amongst the common Islamic concepts used in Islamic banking are profit sharing
(Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah),
and leasing (Ijarah).

66
Appendix 1: Islamic Banking

•In an Islamic mortgage transaction, instead of lending the buyer money to

purchase the item, a bank might buy the item itself from the seller, and re-sell it
to the buyer at a profit, while allowing the buyer to pay the bank in installments.
However, the fact that there is interest cannot be made explicit and therefore
there are no additional penalties for late payment. In order to protect itself
against default, the bank asks for strict collateral. This arrangement is called
Murabaha.

•Another approach is EIjara wa EIqtina, which is similar to real estate leasing.

Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a
higher-than-market price to the debtor and then retaining ownership of the
vehicle until the loan is paid).

67
Appendix 2: Basic Financial Glossary

CEO --Chief Embezzlement Officer.

CFO-- Corporate Fraud Officer.
BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.
VALUE INVESTING -- The art of buying low and selling lower.
P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.
BROKE -- What my broker has made me.
STANDARD & POOR -- Your life in a nutshell.
STOCK ANALYST -- Idiot who just downgraded your stock.
STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.
FINANCIAL PLANNER -- A guy whose phone has been disconnected.
MARKET CORRECTION -- The day after you buy stocks.
CASH FLOW -- The movement your money makes as it disappears down the toilet.
YAHOO -- What you yell after selling it to some poor sucker for $240 per share.
WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.
LONG-TERM INVESTOR – A short-term investor whose investments didn’t go well
PROFIT -- An archaic word no longer in use.

| 68
Time Value of Money Formulae Table ( i = discount rate )
Description Formula (i = Discount Rate )
Future Value, at time n, of an initial amount PV0 invested at FVn = PV0 (1 + i ) n
time 0
FVn
Present value, at time 0, of a Future amount FVn expected at PV0 = FVn (1 + i ) − n =
time n (1 + i ) n

Future Value, at time n, of n constant payments R starting at (1 + i )n − 1

FVn = R
time 1 and ending at time n i

Present Value, at time 0, of n constant payments R starting at 1 − (1 + i ) − n

PV0 = R
time 1 and ending at time n i
Present Value at time 0 of a series of constant payments R R
PV0 =
starting, at time 1 i
Present Value at time 0 (or t) of a series of payments growing PV0 =
R1 R
and PVt = t +1
at a constante periodic and perpetual growth rate g (g<i) i−g i−g

Present Value at time 0, and Future Value at time n, of a finite R1   1 + g  

n
R1
PV0 = 1 −    and FVn = (1 + i) n − (1 + g ) n 
series of payments growing at a periodic growth rate g i − g   1 + i   i−g 
z
Annual Equivalent Rate(AER) computed from an Annual  APR 
EIR = 1 +  −1
Percentage Rate (APR) with z capitalization periods per year  z 
| 69