Important Points for IC 99 - Asset Management Exam
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Time value of money is specifically used for the following purpose of : i) Application of Interest Rates for determination of return of interest - Simple Interest & Compound Interest, ii) Determination of Present Value of Cash Flows, iii) Determination Future Value of Cash Flows, iv) Determination of Cost of Capital or Required Rate of Return, v) Amortising a Loan
Simple Interest : Interest paid (earned) on only the original amount, or principal, borrowed (lent). The simple annual interest rate is the interest amount per period, multiplied by the number of periods per year.
Simple Interest (SI) = Todays Deposit x Interest Rate (%) or P(i)(n)
Addition of interest to the principal amount of a loan or deposit is called compounding. Compound interest is interest on interest. It is calculated using the formula A? = P (1 + i)
Determination of Present Value : Present Value is the current value of a future amount of money or a series of future payments, evaluated at a given interest rate. It is calculated using the formula P = A? [1 / (1 + i)
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