Financial management:

Time value of money:

The time value of money means that a sum of money is worth more now than the
same sum of money in the future.

What do investors want to know ?

1. What will they investment today be worth tomorrow?

2. How much should they invest today so that they have a certain amount in the
future ?

Influence calculation:

- Number of compounding period per year

- Number of years:
 - Interest

The interest rate is the amount a lender charges a borrower and is a percentage of
the principal—the amount loaned. The interest rate on a loan is typically noted on
an annual basis and expressed as annual percentage rates (APR).

1. Compound interest rate:

2. Nominal interest rate

Nominal interest rate refers to the interest rate before taking inflation into
account.

Investors usually want effective rate:

 3. Spot interest rate

The spot rate is the price quoted for immediate settlement on an interest
rate, commodity, a security, or a currency.

4. Forward interest rate

A forward rate is an interest rate applicable to a financial transaction that

will take place in the future

A forward interest rate acts as a discount rate for a single payment from
one future date and discounts it to a closer future date.
Time value of money: Annuities:

The present value of an annuity is the current value of future payments

from an annuity, given a specified rate of return, or discount rate.

1. Investors wants to know what should they invest today to receive

certain payments in the future.
2. What will my investment today be worth in the future ?

Ordinary annuity formula: Present value

An ordinary annuity pays interest at the end of a particular period, rather

than at the beginning.

If annuity payments are made at the beginning of each period use this
formula.
Ordinary annuity: Future value

Perpetuity:

A perpetuity is a security that pays for an infinite amount of time. In

finance, perpetuity is a constant stream of identical cash flows with no
end.
It is essentially an annuity with no termination date.