Page 83 - CFA - Day 1 & 2 Course Notes

LOS 6.f: Demonstrate the use of a Session Unit 2: The Time Value of Money
time line in modelling and solving

time value of money problems..

The Connection Between Present Values, Future Values, and Series of Cash Flows

Example: Additivity principle

A security will make the following payments at the end of the next four years: $100, $100, $400,
and $100. Calculate the present value of these cash flows using the concept of the present
value of an annuity when the appropriate discount rate is 10%.

The additivity principle tells us that to get the

PV of the original series, we can just add the

PVs series #1 (a 4-period annuity) and series
#2 (a single payment 3 periods from now).

For the annuity: N = 4; PMT = 100; FV = 0, I/Y

= 10; CPT → PV = –$316.99

For the single payment: N = 3; PMT = 0; FV = 300; I/Y = 10; CPT → PV = –$225.39

The sum of these two values is 316.99 + 225.39 = $542.38.

Concept checkers, page 98/101