📘 Chapter 6: Time Value of Money Part II

📽️ Chapter 6 Slides (PPT)

Inline viewer uses the Office web viewer. If your browser blocks it, use the buttons below.

Sign rule for Excel (this page): If a formula involves one cash-flow stream (only PV, or only PMT, or only FV is nonzero), write it with ABS(…) around the whole function and keep the cash-flow amount positive. If a formula involves two cash-flow streams (e.g., PV + PMT, PMT + FV), keep Excel’s sign convention (one +, one −).

Quick Guide: New Variables & Rates

Chapter Add-Ons

PMT (Payment): Use Excel PMT() with (rate, nper, pv, [fv], [type]). Distinguish between Ordinary Annuity (type=0) and Annuity Due (type=1).

PMT: recurring cash flow Annuity (type=0) Annuity Due (type=1)

Ordinary Annuity (type = 0)

Blue marker jumps at the end of period t ⇒ Excel type=0.

Annuity Due (type = 1)

Pink marker jumps at the beginning of period t ⇒ Excel type=1.

APR — Annual Percentage Rate

Nominal yearly rate quoted by banks/lenders. It does not include compounding, so typically APR ≤ EAR. Monthly rate = APR/12.

Excel (convert APR → EAR): =EFFECT(nominal_rate, npery)

EAR — Effective Annual Rate

The right annual return including compounding. For APR compounded m times/year:
EAR = (1 + APR/m)^m − 1

Example: APR = 12%, monthly (m=12) → EAR = 12.68%

Excel: =EFFECT(12%, 12)

(Reverse: APR = m * ((1+EAR)^(1/m) − 1). Excel: =NOMINAL(EAR, m))

Homework — Chapters 5 & 6

Answers are hidden for now — Solution coming soon. Open each “Hint” for the exact Excel function and inputs.