• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Quant04
 

Quant04

on

  • 1,728 views

 

Statistics

Views

Total Views
1,728
Views on SlideShare
1,728
Embed Views
0

Actions

Likes
0
Downloads
35
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Quant04 Quant04 Presentation Transcript

    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Why is interest paid?
      Time value of Money
      Opportunity Cost
      Inflation
      Liquidity Preference
      Risk Factor
      Definitions
      Interest – is the price paid by a borrower for the use of a lender’s money
      Principal – is the initial value of lending
      Rate of Interest – the percentage rate at which the interest is charged for a defined length of time for use of principal
      Accumulated Amount – is the final value of an investment
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Simple Interest
      I = P.I.t
      A = P + I = P (1 + i.t)
      I = A – P
      Where
      A = Accumulated Amount
      P = Principal
      i = annual interest rate in decimal
      I = Amount of Interest
      t = time in years
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Compound Interest
      An = P (1 + i)n
      where i = Annual rate of interest / Number of conversion periods per year
      n = number of periods
      An = Accumulated Amount
      P = Principal
       
      Compound Interest = An – P = P [(1+i)n – 1]
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Effective Rate of Interest
      I = P.E.T.
      Where I = amount of interest
      E = Effective rate of interest in decimal
      T = time period
      P = Principal Amount
       
      E = (1+i)n – 1
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Annuity
      An annuity can be defined as a sequence of periodic payments (or receipts) regularly over a specified period of time.
       
      To be called annuity a series of payments (or receipts) must have the following features
      • Amount paid (received) must be constant over the period of annuity, and
      • Time interval between two consecutive payments (or receipts) must be the same
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Annuity
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Future Value
      Future value is the cash value of an investment at some time in the future.
      F = C.F. (1 + i)n
      Where F = Future Value
      CF = Single Cash Flow
      Future value of an annuity (regular)
      If A be the periodic payments the future value A(n i) of the annuity is given by
      A(n i) =
      Future value of Annuity (immediate)
      Calculating the future value of the annuity due involves two steps
      Step 1: Calculate the future value as though it was an ordinary annuity
      Step 2: Multiply the result by 1+i
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Present Value
      Present value and future value are reciprocal to each other. The present value P of an amount An due at the end of n interest period at the rate of i per interest period may be obtained as:
      P = An / (1 + i)n
      Present Value (V) of Annuity Regular (A) of n periods is the sum of the present value of payments
      V = A / (1 + i)1 + A / (1 + i)2 +A / (1 + i)3…. . +A / (1 + i)n
      Alternately A = V / P (n i)
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Present value of an Annuity (immediate) is calculated in two steps
      Step 1: Compute the present value of the annuity as if it were a annuity regular for one period short (n – 1)
      Step 2: Add initial cash payment / receipt to the Step 1 value
       
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Sinking Fund
      Sinking Fund is a fund credited for a specified purpose by way of sequence of periodic payments over a time period at a specified interest rate. Interest in compounded at the end of every period. Size of the sinking fund deposit is computed from A = P.A(n i) where A is the amount to be saved, P the periodic payment, n the payment period.
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Applications of Present Value
      Leasing
      Leasing is a financial agreement under which the owner of the asset (lessor) allows the user of the asset (lessee) to use the asset for a defined period of time (lease period). Present Value concept can be used to find whether giving out an asset on lease is favorable for not.
       
      Capital Expenditure (investment decision)
      Purchase of an asset falls under capital expenditure. Present value concept can be used to calculate whether it is favorable to invest in an asset or not (if inflows from benefits > outflows for purchase)
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1
    • Chapter 4. Simple and Compound Interest including Annuity – Applications
      Applications of Present Value
      Valuation of Bonds
      A bond is a debt security in which the issuer owes the holder a debt and is obliged to repay the principal and interest. Present value concept helps to decide whether or at what rates bonds should be purchased to achieve a specified rate of return.
      Revision Notes – Quantitative Aptitude
      www.cptsuccess.com
      Page 1 of 1