Table of Contents
Preface ix
About the Authors xi
Introduction xiii
Part One The Basics of the Time Value of Money 1
Chapter 1 The Value of Compounding 3
Compounding 7
Calculator and Spreadsheet Solutions 11
Frequency of Compounding 14
Summary 20
“Try It” Solutions 21
Problems 22
Chapter 2 Don’t Discount Discounting 23
Discounting 23
Discounting More Than One Future Value 31
Determining the Number of Compounding Periods 35
Summary 38
“Try It” Solutions 38
Problems 39
Chapter 3 Cash Happens 41
Valuing a Stream of Future Cash Flows 42
Valuing a Perpetuity 51
Annuities 54
Summary 61
“Try It” Solutions 62
Problems 62
Chapter 4 Yielding for Yields 65
Annualized Rates of Interest 65
Determining the Unknown Interest Rate 77
Rules 88
Summary 89
“Try It” Solutions 90
Problems 90
Part Two A Few Applications 93
Chapter 5 Loans 95
Loan Amortization 95
Interest Rates on Loans 104
Determining the Number of Periods 108
Variations on the Theme 109
Summary 114
“Try It” Solutions 114
Problems 115
Chapter 6 Saving to Spend 119
Valuing a Deferred Annuity 119
Annuities with Annuities 126
A Bit of Realism 135
Summary 138
“Try It” Solutions 139
Problems 139
Chapter 7 Values Tied to Bonds 141
Bond Basics 142
Calculating the Yield to Maturity 154
Issues 157
Interest Rates 163
Yield Curves 164
Summary 169
“Try It” Solutions 170
Problems 171
Chapter 8 Taking Stock 173
What’s in a Value? The Basics of Stock Valuation 174
Return on Stocks 187
Summary 192
“Try It” Solutions 193
Problems 195
Chapter 9 A Capital Idea 197
The Net Present Value 198
The Profitability Index 201
The Internal Rate of Return 204
Summary 214
“Try It” Solutions 215
Problems 216
Chapter 10 Finance Fact or Fiction? 219
Fact or Fiction: It Pays to Get an MBA 219
Fact or Fiction: Leasing a Car Costs Less than Buying a Car 222
Fact or Fiction: Gold Has Always Been a Good Investment 225
Summary 230
Appendix A Using Financial Calculators 231
Preparing the Calculator 232
The Basics 235
Financial Functions 237
Tips 242
Troubleshooting Problems 243
Appendix B Using Spreadsheets in Financial Calculations 247
The Basics 247
Time Value of Money Functions 248
Cash Flow Functions 252
Other Useful Functions for Financial Mathematics 253
Appendix C Formulas 255
Appendix D Glossary 261
Appendix E Solutions to End-of-Chapter Problems 265
Index 281
