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Chapter4 Part3

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Chapter4 Part3

Uploaded by

Zain
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CHAPTER 4

Part ….3
The Time Value of Money
Created By
Eng. Maysa Alshraideh
Quiz:

• Chapter4 (part2 + part3)


• 55, 60, 62, 68, 72, 95, 99, 100, 103, 112,
113, 115, 116.
Interest Rates That Vary With Time
• Find the present equivalent value given a future
value and a varying interest rate over the period of
the loan ik : the interest rate of the kth period
• FN P
= ----------------- eq.(4-31)
 N (1 + i k)

• (P/F,i%, N )= 1/(1+i)N eq.


k +1

(4-2)
You can use (F/P,i%,N)= (1+i)N
Example:
If F4 = $1,000 and i1 = 10% , i2 = 12%, i3= 13%
and i4=10% then
P = $1,000* (P/F, 10%, 1)* (P/F, 12%, 1)* (P/F,
13%, 1)* (P/F, 10%, 1)
P = $1,000 (0.9091)(0.8929)(0.8850)
(0.9091)
Nominal And Effective Interest Rates
• Nominal Interest Rate (r ) For rates compounded
more frequently than one time a year, the stated
annual interest rate.
• Effective Interest Rate ( i ) For rates
compounded more frequently than one year, the
actual amount of interest paid.
• i = ( 1 + r / M )M - 1
M : the number of compounding periods per year
• Annual Percentage Rate ( APR ) percentage rate per
period times number of periods.
APR = (r/M) x M
Method1

Method2

This kind of problems can be solved with two ways :


1.get the effective interest rate which is compatible with the period for
example i = 16.14 per year compounded yearly and N = 10 years
OR
2.use the effective interest rate per quarter = 6%(nominal per year) / 4
(compounded times per year) = 1.5% per quarter compounded
quarterly and N = 10 years * 4 = 40 quarter periods
Continuous Compounding and Discrete Cash Flows

• Continuous compounding assumes cash flows occur at


discrete intervals, but compounding is continuous
throughout the interval.
• Given nominal per year interest rate r, compounding per
year M one unit of principal = [ 1 + (r / M ) ] M
• Given M / r = p, [ 1 + (r / M ) ] M = [1 + (1/p) ] rp
• Given lim (p ∞ ) = [ 1 + (1 / p) ]
rp = er

• ( F / P, r%, N ) = (1+i)N = e rN
Then i=e
r -1
• End of Chapter 4 PART 3
• See you next lecture with a very important
revision !!!
• Don’t, miss it !!!!!

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