Page 60 - CFA - Day 1 & 2 Course Notes

LOS 6.e: Calculate and interpret the future Session Unit 2: The Time Value of Money
value (FV) and present value (PV) of a single
sum of money, an ordinary annuity, an annuity

due, a perpetuity (PV only), and a series of Example: PV of an ordinary annuity
unequal cash flows. What is the PV of an annuity that pays
$200 per year at the end of each of the
PV of an Ordinary Annuity next 13 years, given a 6% discount rate?

N = 13; I/Y = 6; PMT = –200; FV = 0; CPT → PV = $1,770.54

The $1,770.54 computed here represents the amount of money that an investor would need
to invest today at a 6% rate of return to generate 13 end-of-year cash flows of $200 each.

15 × $150 = $2,250 (Difference = $3,769.35 - $2,250 9 = $1,519.35 is interest earned rate of 7% per year.

Example: PV of an ordinary annuity Step 1: Find the PV of the annuity as of the end of year 2 (PV2):
beginning later than t = 1 Input PV2: N = 4; I/Y = 9; PMT = –100; FV = 0; CPT → PV =
PV2 = $323.97

What is the PV of four $100 end-of-year
payments if the first payment is to be Step 2: Find the present value of PV2:
received three years from today and the Input PV0: N = 2; I/Y = 9; PMT = 0; FV = –323.97; CPT
appropriate rate of return is 9%? → PV = PV0 = $272.68