1. Business Finance (MGT 232)
Lecture 7

2. Time Value of Money

3. Overview of the Last Lecture
Uneven Cash flow Streams
Impact of frequency compounding
PV and FV Compounding
Nominal Interest rate
Periodic Interest rate
Effective Annual Interest rate

4. Impact of Frequency
Suppose Ali will have Rs after 2 years at an annual interest rate of 12%. What is its PV?
Annual PV =
Semi PV =

5. Impact of Frequency
Qrtly PV
Monthly PV =
Daily PV =

6. Impact of Frequency
Ali has to make equal payments of Rs.1,000 for 2 years at an annual interest rate of 12%. What lump sum amount he should deposit today?
Annual PVA =
Semi PVA =

7. Impact of Frequency
Qrtly PVA
Monthly PVA =
Daily PVA =

8. Finding ‘i’ in Time Value of Money Problems
Suppose you deposit Rs today that will become Rs after 5 years. What interest rate you would earn on your deposit?

9. Finding ‘n’ in Time Value of Money
Suppose you deposit Rs. 100 and you will have Rs. 115 at an interest rate of 5%. Hw much time it will take to earn Rs. 115?

10. Loan Amortization
If a loan is to be repaid in equal periodic payments, it is said to be amortized loan.
It is an application of compounding interest and annuity.
Example: Car Loan, Mortgage Loan, Student Loan

11. Steps to Amortizing a Loan
1. Calculate the payment per period.
Determine the interest in Period t.
(interest x Beg. Amt)
3. Compute principal payment in Period t. (Payment - interest from Step 2)
4. Determine ending balance in Period t. (Balance - principal payment from Step 3)
5. Start again at Step 2 and repeat.

12. Amortizing a Loan Example
Ali is borrowing Rs.10,000 at a compound annual interest rate of 12%. Amortize the loan if annual payments are made for 5 years.
Step 1: Payment
PV =

13. Loan Amortization Schedule

14. Amortizing a Loan Example
[Last Payment Slightly Higher Due to Rounding]

15. Summary Impact of Frequency in PV and PVA
Finding i and n in TMV problems
Amortizing a Loan
Loan Amortization Schedule