 Would you rather have a dollar today or a dollar next year?  Present Value: The use of interest rates to compare the value of a dollar realized today.

Slides:

Advertisements

Similar presentations

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4 Future Value, Present Value and Interest Rates.

Advertisements

Chapter 2 Pricing of Bonds.

Understanding Interest Rates Fundamentals of Finance – Lecture 3.

Interest Rates and the Time Value of Money (Chapter 4)

Finance 1: Background 101. Evaluating Cash Flows How would you value the promise of $1000 to be paid in future? -from a friend? -from a bank? -from the.

CHAPTER 4 BOND PRICES, BOND YIELDS, AND INTEREST RATE RISK.

6- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard.

1 Chapter 4 Understanding Interest Rates. 2 Present Value  One lira paid to you one year from now is less valuable than one lira paid to you today. Even.

Valuation Under Certainty Investors must be concerned with: - Time - Uncertainty First, examine the effects of time for one-period assets. Money has time.

I.N. Vestor is the top plastic surgeon in Tennessee. He has $10,000 to invest at this time. He is considering investing in Frizzle Inc. What factors will.

What Do Interest Rates Mean? Copyright © 2009 Pearson Prentice Hall. All rights reserved. 3-1 Debt markets, or bond markets, allow governments (government.

Understanding Interest Rates

Rate of Return Lesson 2 How Time Value of Money Affects Returns.

Lecture 23. Valuing MBS Valued similar to bonds (fixed incomes) Factors  Prepayment  Weighted average coupon (WAC) ◦ The monthly payment derived from.

Method 3: Pricing of Coupon Bond Pricing of coupon bond without knowing the yield to maturity.

Interest Rates and Rates of Return

Introduction to Bonds Description and Pricing P.V. Viswanath.

Present Value A dollar paid to you one year from now is less valuable than a dollar paid to you today.

Future Value, Present Value and Present Value and Interest Rates.

Chapter 5 Bond Prices and Interest Rate Risk 1Dr. Hisham Abdelbaki - FIN Chapter 5.

1 The market for bond and loans - measuring interest rates and returns Mishkin, Chap 4.

Copyright 2015 by Diane S. Docking 1 Bond Valuation.

Moving Cash Flows: Review Formulas Growing Annuity Annuities are a constant cash flow over time Growing annuities are a constant growth cash flow over.

Quiz 3 solution sketches 11:00 Lecture, Version A Note for multiple-choice questions: Choose the closest answer.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Chapter 4 Future Value, Present Value and Interest Rates.

1 Chapter Six Lecture Notes Long-Term Financing. 2  Used to pay for capital assets when capital costs exceed the cash available from operations or it.

Valuing a Discount Bond with Annual Coupons

Introduction To Valuation: The Time Value Of Money Chapter 4.

Copyright © 2011 Pearson Education, Inc. Managing Your Money.

6-1 Lecture 6: Valuing Bonds A bond is a debt instrument issued by governments or corporations to raise money The successful investor must be able to:

© 2012 McGrawHill Ryerson Ltd. Chapter 6 -  The coupon rate is the annual interest payment divided by the face value of the bond  The interest rate (or.

Chapter 4: Interest Rates

Understanding the Concept of Present Value. Interest Rates, Compounding, and Present Value In economics, an interest rate is known as the yield to maturity.

CHAPTER 5 BOND PRICES AND RISKS. Copyright© 2003 John Wiley and Sons, Inc. Time Value of Money A dollar today is worth more than a dollar in the future.

Topics Covered Future Values Present Values Multiple Cash Flows Perpetuities and Annuities Inflation & Time Value.

Copyright © 2011 Pearson Education, Inc. Managing Your Money.

Pricing of Bonds Chapter 2. Time of Value Future Value Future Valuewhere: n = number of periods n = number of periods P n = future value n periods from.

1 Debt Valuation Topic #2. 2 Context Complete Markets Bonds  Time Value of Money  Bond Valuation Equity Derivatives Real Estate.

Chapter 5 part 2 FIN Dr. Hisham Abdelbaki FIN 221 Chapter 5 Part 2.

CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY.

CHAPTER 5 BOND PRICES AND INTEREST RATE RISK. Learning Objectives Explain the time value of money and its application to bonds pricing. Explain the difference.

Agribusiness Library LESSON L060013: THE TIME VALUE OF MONEY.

Fundamentals of Corporate Finance Chapter 6 Valuing Bonds Topics Covered The Bond Market Interest Rates and Bond Prices Current Yield and Yield to Maturity.

Investment Tools – Time Value of Money. 2 Concepts Covered in This Section –Future value –Present value –Perpetuities –Annuities –Uneven Cash Flows –Rates.

2-1 Copyright © 2006 McGraw Hill Ryerson Limited prepared by: Sujata Madan McGill University Fundamentals of Corporate Finance Third Canadian Edition.

© 2012 McGrawHill Ryerson Ltd. Chapter 6 -  A graph of the relationship between time to maturity and yield to maturity, for bonds that differ only in.

Discounted cash flow; bond and stock valuation Chapter 4: problems 11, 19, 21, 25, 31, 35, 45, 51 Chapter 5: problems 4, 7, 9, 13, 16, 20, 22, 33.

Module 24: The Time Value of Money Present Value : The use of interest rates to compare the value of a dollar realized today with the value of a dollar.

Fundamentals of Corporate Finance Chapter 6 Valuing Bonds Topics Covered The Bond Market Interest Rates and Bond Prices Current Yield and Yield to Maturity.

CHAPTER 4 BOND PRICES, BOND YIELDS, AND INTEREST RATE RISK.

Analytical Methods for Lawyers (Finance) Future value [last updated 6 Apr 09]

Test 1 solution sketches Note for multiple-choice questions: Choose the closest answer.

FIXED INCOME MANAGEMENT1 MEASURING YIELD. FIXED INCOME MANAGEMENT2.

+ Introduction to valuation: The time value of money CH 5.

4-1 Introduction Credit is one of the critical mechanisms we have for allocating resources. Although interest has historically been unpopular, this comes.

Chapter 5 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc.

Lecture 3 Understanding Interest Rate  Future Value & Present Value  Credit market instruments Simple Loan Fixed Payment Loan Coupon Bond Discount Bond.

Present Value of Bond Depends –Time to Maturity(Duration) –Yield to Maturity or Market Interest Rate: Interest rate fluctuate depending on risk –Face Value.

Bond Valuation Chapter 7. What is a bond? A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific.

Treasury Bonds Midterm Review.

Chapter 3 Understanding Interest Rates. Present Value : Discounting the Future A dollar paid to you one year from now is less valuable than a dollar paid.

Finance Questions Assignment Student’s Name Course Title: Course Code: Professor Name: Date:

Question 1 Would a dollar tomorrow be worth more to you today when the interest rate is 20% or 10%? PV = CF/(1 + i) Copyright © 2007 Pearson Addison-Wesley.

Copyright © 1999 Addison Wesley Longman

Future Value, Present Value, and Interest Rates Chapter 4

Future Value, Present Value and Interest Rates

TOPIC 4 INTEREST RATES AND RATES OF RETURN.

CHAPTER 5 BOND PRICES AND RISKS.

BIJAY CHALISE, SWARNA MAHARJAN, DIPESH PANDEY

Presentation transcript:

 Would you rather have a dollar today or a dollar next year?  Present Value: The use of interest rates to compare the value of a dollar realized today with the value of a dollar realized later.  $1 5% interest in savings account.

DEFINING PRESENT VALUE DEFINING PRESENT VALUE FV = future value of $ PV = present value of $ r = real interest rate n = # of years The Simple Interest Formulas FV = PV x ( 1 + r ) n PV = FV/ (1 + r) n

 Assume an original bond was a 20 year bond with a face value of $1,000 and the coupon rate was 5%. That means the owner was receiving $50 in interest payments each year and was planning on receiving the $1,000 back at the end of year 20. But what if the owner need cash and wants to sell the bond after owning it for 18 years and that current interest rates on bonds just like his are 7%. Keep in mind there are two more interest payments due (one next year and one two years from now) and the face value will be due at the date of maturity two years from now. What price can the owner sell the bond for now that current interest rates are higher?

 PV = $50/(1.07) 1 + $1,050/(1.07) 2 = $ $ = $  Now assume interest rates for similar risk bonds are 3%. Now what price can the owner sell the bond?  PV = $50/(1.03) 1 + $1,050/(1.03) 2 = $1,  Note: Bond prices are inversely related to interest rates.