Chapter4FutureValue,PresentValueandInterestRatesMcGraw-Hilly/rwinCopyright 2006byTheMcGraw-Hill Companies,Inc.All rights reserved
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4 Future Value, Present Value and Interest Rates
CONTENSO4.1Future Valueand CompoundInterest4.2PresentValue4.3InternalRateofReturn4.4CouponBondandPresent Value4.5RealandNominalInterestRates4-2
4-2 CONTENS 4.1 Future Value and Compound Interest 4.2 Present Value 4.3 Internal Rate of Return 4.4 Coupon Bond and Present Value 4.5 Real and Nominal Interest Rates
4.1Futuree Value and CompoundOInterest1. Future ValueFuture Value is the value on some futuredate of an investment made today4-3
4-3 4.1 Future Value and Compound Interest 1. Future Value Future Value is the value on some future date of an investment made today
Future Value and CompoundC00Interest$100 + $100(0.05) = $105PVFV+Interest=PVFVPV*i=+PV= PresentValueFV=FutureValuei = interest rate (as a percentage)4-4
4-4 Future Value and Compound Interest $100 + $100(0.05) = $105 PV + Interest = FV PV + PV*i = FV PV = Present Value FV = Future Value i = interest rate (as a percentage)
FutureValueandCompounddInterestFutureValue inone yearFV = PV*(1+i)4-5
4-5 Future Value and Compound Interest Future Value in one year. FV = PV*(1+i)
FutureValue and CompoundOInterestFuture Value in two years$100+$100(0.05)+$100(0.05)+ $5(0.05)=$110.25Present Value of the Initial Investment+ Interest on the initial investment in the 1st Year+ Interest on the initial investment in the 2nd Year+ Interest on the Interest from the 1stYear in the2nd Year=Future Value in TwoYears4-6
4-6 Future Value and Compound Interest Future Value in two years $100+$100(0.05)+$100(0.05) + $5(0.05) =$110.25 Present Value of the Initial Investment + Interest on the initial investment in the 1st Year + Interest on the initial investment in the 2nd Year + Interest on the Interest from the 1stYear in the 2nd Year = Future Value in Two Years
Future Value and CompoundOInterestGeneral Formula-Futureyalueof aninvestment of PV in n years at interest ratei (measured as a decimal, or 5% = .05)FVn= PV*(1+i)r4-7
4-7 Future Value and Compound Interest General Formula – Future value of an investment of PV in n years at interest rate i (measured as a decimal, or 5% = .05) FVn = PV*(1+i)n
FutureeValueandCompound0InterestTable4.1Computing the FutureValue of S100 at 5%Annual InterestComputationFuture ValueYears into Future1$100(1.05)$105.002$100(1.05)2$110.253$100(1.05)3$115.764$100(1.05)4$121.555$100(1.05)5$127.63$100(1.05)1010$162.894-8
4-8 Future Value and Compound Interest Computing Future Value at 5% Annual Interest
Future Value and CompoundaInterestNote:Both n and i must be measured in sametime units-ifiis annual, then n must be inyears, So future value of $100 in 18months at 5% isFV = 100 *(1+.05)1.54-9
4-9 Future Value and Compound Interest Note: Both n and i must be measured in same time units—if i is annual, then n must be in years, So future value of $100 in 18 months at 5% is FV = 100 *(1+.05)1.5
4.2 Present ValueaPresent Value (PV) is the value today (inthe present) of a payment that is promisedto be made in the future.ORPresent Value is the amount that must beinvestedtodayinorderto realize a specifioamountona givenfuture date4-10
4-10 4.2 Present Value Present Value (PV) is the value today (in the present) of a payment that is promised to be made in the future. OR Present Value is the amount that must be invested today in order to realize a specific amount on a given future date