TIME VALUE OF MONEY
VALUATION OF STOCKS AND
BONDS
AE108: Financial Management
ANNUITIES
• Computation of the value of regular and equal
streams of cash
• Can be related to compounding and discounting.
• Ex. Cash is invested regularly towards a target total. Cash
to be collected every month is to be valued as of today.
ANNUITIES
• Has two possible timings
• Ordinary annuity - At the end of the period
• Annuity in arrears (Annuity in advance, or Annuity
Due) - At the beginning of the period
ANNUITIES: FORMULAS
of Ordinary Annuity
ANNUITY: FUTURE VALUE
• Example 1: ABC will invest • Solution 1:
P100,000 every year for five • Determine cash flows.
years, starting the end of the • P100,000 at the end of each year: Y1, Y2,
current year. If the investment Y3, Y4, Y5
will earn 6% per year, how • Compute the future value of each
much is the value of the cashflow.
investment at the end of the • Sum the future value of each.
plan?
ANNUITY: FUTURE VALUE
• Example 1: ABC will invest • Solution 2:
P100,000 every year for five • Determine cash flows.
years, starting the end of the
• Determine which time value factor to
current year. If the investment use.
will earn 6% per year, how • Multiply the cashflows to their
much is the value of the respective time value factors.
investment at the end of the
plan?
ANNUITY: FUTURE VALUE
• Example 1: ABC will invest • Solution 3: Time Line
P100,000 every year for five
years, starting the end of the
• Solution 4: Amortization Table
current year. If the investment
will earn 6% per year, how
much is the value of the
investment at the end of the
plan?
ANNUITY: FUTURE VALUE
• Example 1: ABC will invest
P100,000 every year for five
years, starting now. If the
investment will earn 6% per
year, how much is the value
of the investment at the end
of the plan?
ANNUITY: PRESENT VALUE
• Example 3: On January 1, 2024, a promissory note was received
by the entity indicating a repayment of loan in the amount of
P100,000 per year. Collections are agreed to be every
December 31 starting the current year for a total of 4 payments.
What is the value of the payable now if the applicable rate is
9%?
ANNUITY: PRESENT VALUE
• Example 3: On January 1, 2024, a promissory note was received
by the entity indicating a repayment of loan in the amount of
P100,000 per year. Collections are agreed to be every January
1 starting the current year for a total of 4 payments. What is the
value of the payable now if the applicable rate is 9%?
PRESENT VALUE OF PERPETUITY
• Cashflows may be expected to be regularly received for an
indefinite period of time.
• Computation:
• What is the value of a promise to be paid P100,000 every yearend
if the effective interest rate is 6% and the time period is
• 10 years? 100 years? 1,000 years? Unlimited number of years?
PRESENT VALUE OF PERPETUITY
• P100,000, 6%
10 years 100 years 1000 years
736,008.71 1,661,754.62 1,666,666.67
+90 years +900 years
+P925,745.92 +P4,912.04
PRESENT VALUE OF PERPETUITY
• P100,000, 6%, forever???
• Computation • Formulas:
• P100,000/ 0.06 • PV = PA/i
• P100,000 * (1/0.06) • PV = PA * PVF
• P 1,666,666.67 • PVF = 1/i
APPLYING TVM ON BONDS AND STOCKS
• Bonds and stocks provide earnings and cashflows
to organizations holding these securities as
investments.
• The value today is equal to the present value of the
earnings or cashflows from the security.
APPLYING TVM ON BONDS AND STOCKS
• General Steps:
• Identify the valuation date.
• Identify cashflows
• Identify timing of each cashflow.
• Compute the present value of each cashflow.
• Sum the present values.
THEORY ON BONDS
• Straight or Term vs Serial
• Interest-bearing vs Non-interest bearing
THEORY ON STOCKS
• Going Concern
• General Assumption: Perpetuity
• May use Return on Equity Formula
• ROE = Expected Return / Equity Value
• Equity Value = Expected Return / Return on Equity
BOND VALUATION
• Example: • Case 1: Default = Straight
• Non- Interest Bearing Bonds
• Principal Amount = • Case 2: Additional Given: Serial
P2,000,000
• Term = 4 years
• Effective Interest = 9%
Value of the bonds as of issue
date? as of the end of one year?
BOND VALUATION
• Example: • Case 1: Default = Straight
• Interest Bearing Bonds
• PA= P2,000,000 • Case 2: Additional Given: Serial
• Term = 4 years
• Effective Interest = 9%
• Nominal Rate = 8%
Value of the bonds as of issue
date? as of the end of one year?
STOCK VALUATION
• Example: • Example:
• Dividends = P10 • Earnings = P10
• Expected Rate of Return = • Expected Rate of Return =
12.5% 12.5%
TIME VALUE OF MONEY
VALUATION OF STOCKS AND
BONDS
AE108: Financial Management
