1 / 3

But, before we begin, it is also important to use time value of money for less than one year.

But, before we begin, it is also important to use time value of money for less than one year.

goro
Download Presentation

But, before we begin, it is also important to use time value of money for less than one year.

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. But, before we begin, it is also important to use time value of money for less than one year. Start with an annualized rate of 6%. Other descriptions include an effective annual yield (EAY), or an effective annual rate (EAR). So, the question becomes how to convert to annual rate to a periodic rate. Let’s start with monthly: (1 + X)12 = (1.06) so X = [(1.06)1/12] –1 So, X = 0.0048675, or 0.48675%, or 48.68 basis points per month.

  2. Now, let’s figure out how much 100,000 is worth for one month at an annualized rate of 6%. 100,000(1.0048675) =$100,486.75 What about 2 months? 100,000(1.0048675)2 =$100,975.87 Another, and easier way to do this is 100,000(1.06)(2/12) = =$100,975.87 So, in general, FV = PV(1+EAR)(h/n) And, of course PV = FV/(1+EAR)(h/n) Where h = # of periods and n = the # of total periods in a year

  3. If the interest rate is a nominal rate, also referred to as a stated rate, you treat this differently: Suppose we have a nominal rate of 6%, but paid monthly for the same $100,000. Then, FV = 100,000(1 + .06/12) = $100,500 And for 2 months, 100,000(1.005)2 = 101,002.50. Notice the difference compared to using an EAY or EAR is about $27 more interest for this example.

More Related