Professional Documents
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Chapter Objectives
risk
preference for consumption
investment opportunities
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Time Value
Adjustment
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Future Value
Fn P (1 i ) n
The term (1 + i)n is the compound value factor (CVF) of a lump
sum of Re 1, and it always has a value greater than 1 for positive
i, indicating that CVF increases as i and n increase.
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Future Value
Fn =P CVFn,i
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Rule of 72
The Rule of 72 is a simplified way to determine
how long an investment will take to double,
given a fixed annual rate of interest. By dividing
72 by the annual rate of return, investor can get
a rough estimate of how many year it ill take for
the initial investment to duplicate itself.
For example, the rule of 72 states that Rs.1
invested @ 8% would take 9 years (72 / 8) to
turn into Rs.2. In reality a 8 %, investment will
take 9.0064 years to double.
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Rules of 115
The Rules of 115 is used to determine how
long an investment will take to triple, given a
fixed annual rate of interest. By dividing 115
by the expected annual rate of return,
investors can get a rough estimate of how
many years it will take for the investment will
take to triple the initial investment.
We will first find out the compound value factor at 15 per cent
for 10 years which is 4.046. Multiplying 4.046 by Rs 55,650, we
get Rs 225,159.90 as the compound value:
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Example
(1 i ) n 1
Fn A
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Fn =A CVFA n, i
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Example
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Present Value
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Fn
n
F
(1
i
)
n
n
(1 i )
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Example
n
i i 1 i
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P = A PVAFn, i
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Perpetuity
Interest rate
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EMI Calculation
(P*R/12) * [(1+R/12)^N] / [(1+R/12)^N -1]
P= Loan Amount
R= Rate of Interest
N= No. of Monthly Installments
Excel Function:
PMT
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