DR. NARGUNDKAR PERS 2002 Finance Basics. Classification Corporate Finance Capital Budgeting –...
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Transcript of DR. NARGUNDKAR PERS 2002 Finance Basics. Classification Corporate Finance Capital Budgeting –...
Classification
Corporate Finance Capital Budgeting – where should we invest? Capital Structure – where do we get the money from? Net Working Capital – how do we manage day-to-day
transactions?
Personal Finance
Time Value of Money
Present ValueFuture Value
Interest Rates Nominal Periodic Effective
http://www.teachmefinance.com
Interest Rates
A bank charges 24% APR on a loan, payable monthly. What are the nominal, periodic and effective rates?
APR of is the Annual Percentage Rate, and is the nominal rate for a year. Thus nominal rate = 24%
If you pay monthly, you pay over 12 periods. The periodic rate is 24/12 =2% per month.
The effective rate is based on what is actually paid out over the year. If you borrowed $100, you pay
100(1+0.02)12 = 100(1.2682) = $126.82
Thus the effective interest rate is 26.82%.
Present and Future Values
You borrow $1000 now, with a promise to pay 8% per year in interest, compounded annually. If you pay if all off at the end of 5 years, what is the amount you must pay?
PV = 1000i = 8%n = 5
FV = PV(1+i)n = 1000(1.08)5 = 100(1.4693) = $146.93