FINANCIAL MANAGEMENT

Lecture#11
Present Value Of Annuity Due
 Periodic Rate, IPER
• This is the rate charged by a lender or paid by a
borrower each period. It can be a rate per year,
per 6 months (semiannually), per quarter, per
month, per day, or per any other time interval.
For example, a bank might charge 1.5% per
month on its credit card loans, or a finance
company might charge 3% per quarter on
installment loans.
• We find the periodic rate as follows:
 Periodic Rate, IPER
• Periodic rate IPER = INOM/M
• where INOM is the nominal annual rate and M
is the number of compounding periods per
year. Thus, a 6% nominal rate with semiannual
payments results in a periodic rate of Periodic
rate IPER = 6%/2 = 3.00%.
• If only one payment is made per year then M =
1, in which case the periodic rate would equal
the nominal rate: 6%/1 = 6%.
 Future Value Calculation
• To illustrate, suppose you invest $100 in an
account that pays a nominal rate of 12%,
compounded quarterly, or 3% per period.
Future Value Calculation
 loan amortization
• The determination of the equal periodic loan
payments necessary to provide a lender with a
specified interest return and to repay the loan
principal over a specified period.
• The term loan amortization refers to the
determination of equal periodic loan
payments. These payments provide a lender
with a specified interest return and repay the
loan principal over a specified period.
 loan amortization schedule
• A schedule of equal payments to repay a loan. It
shows the allocation of each loan payment to
interest and principal.
• Lenders use a loan amortization schedule to
determine these payment amounts and the
allocation of each payment to interest and
principal.
• Amortizing a loan actually involves creating an
annuity out of a present amount.
AMORTIZING A LOAN
EXAMPLE
EXAMPLE
Amortization schedule
 EXAMPLE
• you borrow $6,000 at 10 percent and agree to
make equal annual end-of-year payments over
4 years. To find the size of the payments, the
lender determines the amount of a 4-year
annuity discounted at 10 percent that has a
present value of $6,000
EXAMPLE
 EXAMPLE

• 6000=PMT 1-[1/(1+10)^4]/10%
• 6000*10%=PMT1-[1/1.4641]
• 600=PMT(1-0.683)
• 600=PMT(0.317)
• 600/0.317 =PMT
• PMT=1892.82
AMORTIZATION SCHEDULE
 FINDING INTEREST OR GROWTH RATES

• It is often necessary to calculate the

compound annual interest or growth rate
(that is, the annual rate of change in values) of
a series of cash flows. Examples include
finding the interest rate on a loan, the rate of
growth in sales, and the rate of growth in
earnings.
FINDING INTEREST OR GROWTH RATE
FINDING INTEREST OR GROWTH RATE
FRACTIONAL TIME PERIODS
FRACTIONAL TIME PERIODS