Time value of money Cheat Sheet

by Natalie Moore (NatalieMoore) via cheatography.com/19119/cs/11141/

Variable key Equation guide (cont) Stated Versus Effective Annual Interest
Rates (cont)
Where: Present Value of an Ordinary Annuity
Maximum effective annual rate for a stated
FV = Future value of an investment PV = PMT/r x [1 - 1 / (1 + r)n]
annual rate occurs when interest compounds
PV = Present value of an investment (the Present Value of Annuity Due contin​uously
lump sum)
PV (annuity due) = PMT/r x [1 - 1 / (1 + r)n] x (1 EAR = ( 1 + r/m )m - 1
r = Return or interest rate per period + r)
(typically 1 year)
Compou​nding contin​uously: EAR
n = Number of periods (typically years) Lump sum future value in excel (conti​nuous compou​nding) = er - 1
that the lump sum is invested

PMT = Payment amount Deposits Needed to Accumulate a Future

CFn = Cash flow steam number Sum

m = # of times per year r compounds Determine the annual deposit necessary to

accumulate a certain amount of money at
Equation guide some point in the future

Future value of a lump sum: E.g. house deposit

Present Value of a Growing Perpetuity
Can be derived from the equation for fi nding
FV = PV x (1 + r)n
Most cash flows grow over time the future value of an ordinary annuity
- Future​​-value factor (FVF) table
This formula adjusts the present value of a Can also be used to calc required deposit
- Excel future value formula FV= perpetuity formula to account for expected
PMT = FV {[( 1 + r)n - 1 ] / r}
- Compound interest. Formula for simple growth in future cash flows

interest is PV + (n x (PV x r)) Calculate present value (PV) of a stream of

Once this is done substitute the known values
Future Value of an Ordinary Annuity cash flows growing forever (n = ∞) at the
of FV, r, and n into the righthand
constant annual rate g
FV = PMT x { [ ( 1 + r )n - 1 ] / r} side of the equation to find the annual deposit
PV = CF1 / r - g r > g required.
Future Value of an Annuity Due

FV (annuity due) = PMT x { [ ( 1 + r)n -1 ] / r } x Loan Amorti​zation

Stated Versus Effective Annual Interest
(1 + r) Rates
A borrower makes equal periodic payments
Future Value of Cash Flow Streams
Make objective compar​isons of loan costs or over time to fully repay a loan
FV = CF1 x (1 +r)n-1 + CF2 x (1 + r)n-2 + ... + investment returns over different compou​nding E.g. home loan
CFn x (1 + r)n-n periods
Uses
Present value of a lump sum in future Stated annual rate is the contra​ctual annual
- Total $ of loan
rate charged by a lender or promised by a
PV = FV / (1 + r)n = FV x [ 1 / (1+ r)n ]
borrower - Term of loan
- Presen​t-value factor (FVF) table
Effe​ctive annual rate (EAR) AKA the true - Frequency of payments
- Excel present value formula PV=
annual return, is the annual rate of interest - Interest rate
Present Value of a Mixed Stream actually paid or earned
Finding a level stream of payments (over the
PV = [CF1 x 1 / (1 + r)1] + [CF2 x 1 / (1 + r)1] + - Reflects the effect of compou​nding term of the loan) with a present value
... + [CFn x 1 / (1 + r)1] frequency calculated at the loan interest rate equal to the
amount borrowed
- Stated annual rate does not
Loan amorti​zation schedule Used to
determine loan amorti​sation payments and the
allocation of each payment to interest and
principal

By Natalie Moore Published 19th March, 2017. Sponsored by CrosswordCheats.com

(NatalieMoore) Last updated 19th March, 2017. Learn to solve cryptic crosswords!
cheatography.com/nataliemoore/ Page 1 of 3. http://crosswordcheats.com
www.speedwell.com.au/
 Time value of money Cheat Sheet
by Natalie Moore (NatalieMoore) via cheatography.com/19119/cs/11141/

Loan Amorti​zation (cont) Present value Special applic​ations of time value

Portion of payment repres​enting interest Used to determine what an investor is willing to Use the formulas to solve for other variables
declines over the repayment period, and the pay today to receive a given cash flow at some - Cash flow CF or PMT
portion going to principal repayment point in future.
- Interest / Discount rate r
increa​ses Calcul​ating present value of a single future
- Number of periods n
cash payment
PMT = PV / {1 / r x [ 1 - 1 / (1 + r)n ] }
Common applic​ations and refine​ments
Depends largely on investment opport​unities of
recipient and timing of future cash flow - Compou​nding more frequently than
Concept of future value
annually
Disc​oun​ting describes process of calcul​ating
Apply simple interest, or compound interest to a
present values - Stated versus effective annual interest rates
sum over a specified period of time.
- Determines present value of a future - Calcul​ation of deposits needed to
Interest might compound: annually, accumulate a future sum
amount, assuming an opport​unity to earn a
semian​nual, quarterly, and even continuous
return (r) - Loan amorti​sation
compou​nding periods
- Determine PV that must be invested at r
Future value value of an investment made
today to have FV, n from now Compou​nding More Frequently Than
today measured at a specific future date using
- Determines present value of a future Annually
compound interest.
amount, assuming an opport​unity to earn a Financial instit​utions compound interest
Compound interest is earned both on principal
given return (r) on money. semian​nually, quarterly, monthly, weekly, daily,
amount and on interest earned
We lose opport​unity to earn interest on money or even contin​uously.
Prin​cipal refers to amount of money on which until we receive it The more frequently interest compounds, the
interest is paid.
To solve, inverse of compou​nding interest greater the amount of money that accumu​lates
Impo​rtant to unders​tand
PV of future cash payment declines longer Semi​annual compou​nding
After 30 years @ 5% a $100 principle account investors wait to receive
Compounds twice per year
has:
Present value declines as the return (discount) Quar​terly compou​nding
- Simple Interest: balance of $250.
rises.
- Compound interest: balance of $432.19 Compounds 4 times per year
E.g. value now of $100 cash flow that will come
m values:
FV = PV x (1 + r)n at some future date is less than $100
Semiannual 2
The Power of Compound Interest PV = FV / (1 + r)n = FV x [ 1 / (1+ r)n ] Quarterly 4

Monthly 12
The Power of Discou​nting
Weekly 52

Daily 365

Cont​inuous Compou​nding

m = infinity

Future Value of One Dollar

By Natalie Moore Published 19th March, 2017. Sponsored by CrosswordCheats.com

(NatalieMoore) Last updated 19th March, 2017. Learn to solve cryptic crosswords!
cheatography.com/nataliemoore/ Page 2 of 3. http://crosswordcheats.com
www.speedwell.com.au/
 Time value of money Cheat Sheet
by Natalie Moore (NatalieMoore) via cheatography.com/19119/cs/11141/

Compou​nding More Frequently Than Finding the Future Value of an Annuity Due Present Value of Annuity Due
Annually (cont)
Slight change to those for an ordinary annuity Similar to mixed stream / ordinary annuity
e = irrational number ~2.718​3.13 Payment made at beginning of period, instead Discount each payment and then add up each
General equation: FV = PV x (1 + r / m)mxn of end term

Earns interest for 1 period longer Cash flow realised 1 period earlier
Continuous equation: FV (conti​nuous Earns more money over the life of the Annuity due has a larger present value than
compou​nding) = PV x ( erxn ) investment ordinary annuity

FV (annuity due) = PMT x { [ ( 1 + r)n -1 ] / r } PV (annuity due) = PMT/r x [1 - 1 / (1 + r)n] x

Future Value of Cash Flow Streams
x (1 + r) (1 + r)
Evaluate streams of cash flows in future
periods. Present Value of Cash Flow Streams Present Value of a Perpetuity
Two types:
Present values of cash flow streams that occur Level or growing cash fl ow stream that
Mixed stream = a series of unequal cash flows over several years continues forever
reflecting no particular pattern
Might be used to: Level = infinite life
Annu​ity = A stream of equal periodic cash
- Value a company as a going concern Simplest modern example = prefered stock
flows
- Value a share of stock with no definite Preferred shares promise investors a constant
More compli​cated than calc future or present maturity date annual (or quarterly) dividend payment forever
value of a single cash flow, same basic
= sum of the present values of CFn - express the lifetime (n) of this security as
techni​que.
infi nity (∞)
Perp​etu​ity: A level or growing cash flow
Shortcuts available to eval an annuity
stream that continues forever PV = PMT x 1/r = PMT/r
AKA terminal value
Same technique as a lump sum
FV of any stream of cash flows at EOY = sum
Present Value of a Mixed Stream = Sum of
of FV of individual cash flows in that stream, at
present values of individual cash flows
EOY

Each cash flow earns interest, so future value Mixed stream:

of stream is greater than a simple sum of its PV = [CF1 x 1 / (1 + r)1] + [CF2 x 1 / (1 + r)1]

cash flows + ... + [CFn x 1 / (1 + r) 1]

FV = CF1 x (1 +r)n-1 + CF2 x (1 + r)n-2 + ... +

Present value of an ordinary annuity
CFn x (1 + r)n-n

Present Value of an Ordinary Annuity

Future Value of an Ordinary Annuity
Similar to mixed stream
Two basic types of annuity:
Discount each payment and then add up each
Ordinary annuity = payments made into it at term
end of each period
PV = PMT/r x [1 - 1 / (1 + r)n]
Annuity due = payments made into it at the
beginning of each period (arrives 1 year
sooner)

So, future value of an annuity due always

greater than ordinary annuity

Future value of an ordinary annuity can be

calculated using same method as a mixed
stream

FV = PMT x { [ ( 1 + r )n - 1 ] / r}

By Natalie Moore Published 19th March, 2017. Sponsored by CrosswordCheats.com

(NatalieMoore) Last updated 19th March, 2017. Learn to solve cryptic crosswords!
cheatography.com/nataliemoore/ Page 3 of 3. http://crosswordcheats.com
www.speedwell.com.au/