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Foundations of Finance A Complete Lecture Notes
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Full and Complete Lecture notes for Foundations of Finance Course at the University of Manchester. BMAN23000
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Wednesday, 25 January 2017Foundations of Finance Lecture Notes
Lectures 1 & 2 - Time Value of Money and Interest Rates
Time Value of Money
What is the value of an investment made today at a specific future date? (Future Value)
What is the value today (Present Value) of a cash flow to be received at a specific date
in the future?
• Inflows are denoted by positive numbers, outflows are denoted by negative
numbers
• Cash flows can be presented on annual, semi-annual, monthly basis
Rules of Time Travel
Basic concept: £1 Today is worth more than £1 tomorrow (impatience, inflation etc.)
1) Comparing and Combining Values
• It is only possible to compare and combine (add and subtract) values at the same
point in time
2) Moving Cash Flows Forward in Time
• To move a cash flow forward in time you must compound it (at an appropriate rate)
• FVn = C0 (1+ r)n
3) Moving Cash Flows Back in Time
• To move a cash flow back in time you must discount it
• PV0 = Cn / (1+ r)n
1
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Compounding Values
2
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Discounting Values
3
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Perpetuities
A perpetuity is a stream of equal cash flows that occur at regular intervals and last
forever
Given in formula book
Logic:
• Invest C / r today
• Grows to C / r(1+r) = C / r + C next period
• Withdraw C and reinvent C / r
- Constant cash flow C forever
- Cost of Initial investment (PV) = C / r
Annuities
An annuity is a stream of N equal cash flows paid at regular intervals (fixed number of
payments)
Logic:
• The same concept but after N periods, investment is closed and you withdraw initial
investment P
4
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