University:
York University
Course:
ADMS 2541 | Introduction to Personal Finance
Academic year:

2021
Views:

137

Pages:

2
Author:

Niklas

Formula TVM: FV = PV × (1 + r)^N FV: Future value PV: Present value r: Interest rate N: # of years PV(annuity) = PMT × [(1 + r)^N - 1] / [r(1 + r)^N] PMT: Payment - Ordinary annuities → Cash flows generated at the end of every period ex. Mortgage - Annuities due → Cash flows generated at the start of every period ex. Apartment rent • Perpetuities - Even cash flows - Never stop - Starts one period away from today - Per period - PV(perpetuity) = PMT / r • Deferred Annuities - Even cash flow - Stops at some point - 1st payment multiple periods from today - AND - 1st payment one period away from reference point: Period before 1st CF • Deferred Perpetuities - Same as DA's - EXCEPT - Payments go on forever Annual Percentage Rate (APR) → doesn't consider compounding Rate per period × # of periods in a year = APR Effective Annual Rate (EAR) → considers compounding EAR = (1 + rate/period)^# of periods in a year - 1 Growing Annuity - Cash flow uneven - 1st payment one period away PV = CF + CF + CF + ... + CF = Normal Annuity (1+r) (1+r)^2 (1+r)^3 (1+r)^N PV = CF + CF(1+g) + CF(1+g)^2 + ... + CF(1+g)^(N-1) = Growing Annuity (1+r) (1+r)^2 (1+r)^3 (1+r)^N OR PV = CF × [(1+g)^N - 1] / [r(1+g)^N - g(1+r)^N] Fisher Effect 1+R = (1+r) × (1+h) R: Nominal rate r: Real rate h: Inflation rate One Period Model: - Buy stock today - Get dividend - Sell immediately Finite: Stock Price PV = PV(Dividends) + PV(Selling Stock Price) Zero growth: P₀ = Dividend / r Price = PV = PMT / r Constant Growth: Dn = D₀(1+g)^N CFₙ = Dn(1+g) Po = D₁ / (r - g)