# Financial Modelling: TVM Basic

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 Author: jordan_hs ID: 286446 Filename: Financial Modelling: TVM Basic Updated: 2014-10-20 22:31:17 Tags: 125 250 M3 TVM Folders: Description: Show Answers:

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1. Time value of money
• A dollar today is worth more than a dollar tomorrow. This is called the time value of money.

• • Due to
• – the potential earning capacity of money.
• – the destructive force of inflation.

•Time value of money is a fundamental concept of finance.
2. Future Value
3. Present Value
4. Compound Frequency
• • Compound interest arises when interest is added to the principal, so that, from that moment on, the interest that has been added also earns interest.
• • If interest was paid once per year. This is called annual compounding. Often, interest is paid more often than once per year

5. Annuity
Stream of equal periodic cash flows over a specified time period

• Two types:
• 1) ORDINARY ANNUITY: C.F. occurs at end of each period
• 2) ANNUITY DUE: C.F. occurs at beginning of each period
6. FV of Ordinary Annuity
7. FV of Annuity Due
Earns interest for a year more than an ordinary annuity, as the cash flows occur at the start of the period.

Annuity Due = Ordinary Annuity X (1+i)
8. PV of Ordinary Annutiy
9. NPV Function
Computes the present value (not net present value!) of a series of payments
10. PV vs. NPV
• The primary difference between PV and NPV:

• PV allows cash flows to begin either at the end or at the beginning of the period.
• As for NPV, cash flows must be equally spaced in time (must be constant throughout the investment) and occur at the end of each period.
11. NPER Function
• • Calculates the number of periods to repay a loan given a fixed repayment
• = NPER (B9, B11, -B10)

• a is the interest rate
• b is the annual payment
• c is the loan amount
12. Loan amortization
• You borrow \$10,000 for 5 years
• Interest rate 7%
• Bank wants same sum X repaid each year
• How to compute X?

Note: PMT
• PMT Function
• = PMT (C4, C5, C6)

• a is the interest rate
• b is the number of periods
• c is the principle

PMT is similar to PV regarding its assumptions of payments being at the end of the period and it producing a negative number
13. Why Solver instead of Goal Seek?
• Solver “remembers” what it did before, whereas Goal Seek“forgets”
• – If you do another iteration of the problem with Solver, it will recall its previous settings

• Solver can do more sophisticated calculations: It can do linear programming …
14. RATE function
• Calculates the internal rate of returns of a series of constant payments

= RATE (B13, B14, - B12 ,,1)

• • a is the number of periods
• • b is the annual payment
• • c is the initial payment
• • d indicates that the payments occur at the beginning of each period

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