simple interest
equal amounts every year (month)
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= proportion of the original investment
principal
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S = P + nrP
S: the sum invested after n periods
P: the orginal sum invested
r: the interest rate
n: the number of periods (year/month)
compound interest
interest earned will earn interest in later periods
S = P (1+r)^n
P: the original sum invested
r: the interest rate
n: the number of periods (year/month)
S: the sum invested after n periods
effective interest rates
annual rate of interest
made annual interest from daily, weekly, monthly, quarterly interest
interest is compounded daily, weekly, monthly...
[(1+r)^(12/n) - 1]
n: months
[(1+r)^(365/y) - 1]
y: days
nominal interest rates
per annum figures
interest is compounded over (less) than one year
Principles of discounted cash flow
1.1.1 present value
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= discount factor
= 1/(1+r)^n
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money invested to earn future sum
discounting formula
P = S*1/(1+r)^n
P: present value
S sum to be received after n time periods
r: rate to return, expressed as a proportion
n number of time periods
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= r: cost of capital
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Annuities, perpetuities
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= annuity factors
cumulative present value factors
= [1 - (1+r)^(1/n)]/r
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