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Time value of money

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Compound interest : int earned on int

FV_n = PV x (1 + i ) ^n
FV_n = future value at the end of period n
PV = present value
i = interest rate
n = num of periods

PV = FV_n x [ 1 / (1+i) ^ n ]

As savers, we like COMPOUNDED INTEREST
As borrowers, compounded interest work AGAINST us

EAR = effective annual interest rate
(1 + EAR) = (1 + r ) ^ m
r = i / m
i = nominal annual rate
m = compounding freq

Annuity = a series of payments of EQUAL AMOUNT made at FIXED INTERVALS for a specified period of time.
ordinary annuity = pay @ period end
annuity due = pay @ period beginning

FVIFA_i,n = [ ( (1 + i)^n – 1 ) / i]
future value of an annuity paying $A, FVA_i,n = A x FVIFA_i,n

FVIFA_i,n (annuity due) = FVIFA_i,n x (1 + i)

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Written by blueroselady

November 24, 2009 at 4:09 pm

Posted in finance, study

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