Scribd
Upload
114 views24 pages

Time Value of Money: Pooja Gupta

This document discusses the time value of money and various financial concepts related to interest, present and future values, annuities, perpetuities, and bond and equity valuation. It provides formulas and examples for calculating present and future values of single amounts, annuities, growing annuities, and bonds. It also discusses the dividend discount model for valuing equity and the effect of different compounding periods on effective interest rates.

Uploaded by

Ragh Krishh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
114 views24 pages

Time Value of Money: Pooja Gupta

This document discusses the time value of money and various financial concepts related to interest, present and future values, annuities, perpetuities, and bond and equity valuation. It provides formulas and examples for calculating present and future values of single amounts, annuities, growing annuities, and bonds. It also discusses the dividend discount model for valuing equity and the effect of different compounding periods on effective interest rates.

Uploaded by

Ragh Krishh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 24

TIME VALUE OF

MONEY

POOJA GUPTA
APNA SAPNA MONEY MONEY
RUPEE IN HAND IS BETTER THAN
TWO IN THE FUTURE
MONEY IN BANK GIVES MORE
RETURN THAN IN SAFE
INFLATION-TRUE MEANING
SIMPLE & COMPOUND
INTEREST
SIMPLE INTEREST IS SIMPLE
COMPOUND INTEREST IS
COMPOUND..
COMPARISON
SIMPLE INTEREST
Rs. 1000 becomes
total amount after:
1Yr -1100
10 Yr -2000
50 Yr -6000
100 Yr -11000
COMPOUND INTEREST
Rs. 1000 becomes total
amount after:
1Yr -1100
10 Yr -2594
50 Yr -117390
100 Yr -13780612


TERMINOLOGY
Present Value (PV) of an amount that will be
received in the future
Future Value (FV) of an amount invested now at a
given rate of interest
Present Value of a Annuity (PVA) is the present
value of a stream of (equally-sized) future
payments
Present Value of a Perpetuity is the value of a
regular stream of payments that lasts "forever", or
at least indefinitely
Future Value of a Annuity (FVA) is the
future value of a stream of payments (annuity)



PRESENT VALUE OF A
FUTURE SUM
1. PV is the value at
time=0
2. FV is the value at
time=n
3. i is the rate at which the
amount will be
compounded each
period
4. n is the number of
periods
APPLICATION
You expect to receive Rs.10,000 6 years
from now. The current market interest rate
is 10%. How much investment will you
make today?
Rs. 565
FUTURE VALUE OF
PRESENT SUM
The future value (FV)
formula is similar and
uses the same variables.
1. PV is the value at
time=0
2. FV is the value at
time=n
3. i is the rate at which the
amount will be
compounded each
period
4. n is the number of
periods
APPLICATION
You have received Rs. 20,000 from your
grandparents. You invest the money in
bank fixed deposit which pays 9% annual
interest. The fixed deposit is for 5 years.
How much money will you receive at the
time of maturity?
Rs. 30,780
PRESENT VALUE OF
ANNUITY
1. PVA the value of the
annuity at time=0
2. A the value of the
individual payments in
each compounding
period
3. i equals the interest rate
that would be
compounded for each
period of time
4. n is the number of
payment periods.
APPLICATION
You want to buy a car. At present auto loan
rate is 12% per annum. You can
comfortably pay monthly installment of
Rs.10,000 for the next 5 years. How much
can you borrow right now?
Rs. 4,32,600
PRESENT VALUE OF
GROWING ANNUITY
1. PVA the value of the
annuity at time=0
2. A the value of the
individual payments in
each compounding
period
3. i equals the interest rate
that would be
compounded for each
period of time
4. n is the number of
payment periods.
5. g is growth rate of
annuity
APPLICATION
You are looking to buy a property for
investment purpose. The current rental
(annual) at the kind of properties you are
looking at is Rs. 1,80,000. The growth rate
in rental is 8% p.a. The discount rate is
10% p.a. What is the kind of investment
you will be looking at taking 5 years as
time period?
Rs. 82,11,305


PRESENT VALUE OF
ANNUITY
1. PVA the value of the
annuity at time=0
2. A the value of the
individual payments
in each
compounding period
3. i equals the interest
rate that would be
compounded for
each period of time

APPLICATION
Valuation of equity shares
What should be the present value of a share
which pays a dividend of Rs.20 per share.
It is expected the company will keep
paying the same amount as dividend
forever. The discount rate is 12%.
Rs.166.67
FUTURE VALUE OF
ANNUITY
1. FV(A), the value of the
annuity at time = n
2. A, the value of the
individual payments in
each compounding
period
3. i, the interest rate that
would be compounded
for each period of time
4. n, the number of
payment periods
APPLICATION
You have a PPF account in which you can
deposit Rs.60,000 per year (max.
investment). At 11% interest rate and 15
year maturity; how much money will you
have at maturity ?
Rs.20,64,300
And for minimum investment of Rs.500?
Rs. 17,203
EFFECTIVE VS. STATED
RATE OF INTEREST
I is the stated annual
interest rate
N is the frequency of
compounding each
year
R is the effective
interest rate
EFFECTIVE VS. STATED
RATE OF INTEREST
What is the effective interest rate, given
annual interest rate as 12% being
compounded:
Annually
Semi annually
Quarterly
Monthly
Daily

VALUATION OF BONDS
Bond valuation is the process of determining the
fair price of a bond
The fair value of a bond is the present value of
the stream of cash flows it is expected to generate
The price or value of a bond is determined by
discounting the bond's expected cash flows to the
present using the appropriate discount rate

Bond Valuation Contd..
Cash flows:
the periodic coupon payments
C, each of which is made
once every period;
the par or face value F, which
is payable at maturity of the
bond after T periods.(NB final
year payment will include the
par value plus the coupon
payment for the year)
Discount rate: the required
(annually compounded) yield
or rate of return r.
r is the market interest rate for
new bond issues with similar
risk ratings

EQUITY VALUATION
The Dividend Discount Model (DDM) is the
basis of understanding other methods of
valuation.
Lets begin with the simplest model: the Steady
Growth Model. This is best used for large
companies with predictable dividend growth.
Price = D/(r-g)
D = Current Dividend
r = Discount Rate (the companys WACC)
g = Dividend Growth Rate

EQUITY VALUATION
There is also a Multi-Stage Growth Model. This
is used for companies that are expected to
experience fast growth in their dividend at first
followed by slower, more predictable growth as
the company matures.
There is no standard, plug-and-chug equation for
this model. However, it still uses the same form
as the Steady Growth Model.
EQUITY VALUATION
Heres an example:




Here, the company is assumed to have dividend
growth of 20% for next 5 yrs., 10% for next 2
yrs., and 7% thereafter, with the current dividend
being 1.24, and a discount rate of 13.66%

You might also like