Reference

This annex provides a consolidated glossary of core financial formulas and concepts taught in the course.

1. Interest Compounding

$$FV=PV{(1+\frac{r}{n})}^{nt}$$

Where:

• $FV$ = Future Value (final amount)
• $PV$ = Present Value (principal investment today)
• $r$ = Annual interest rate (nominal)
• $n$ = Number of compounding periods per year
• $t$ = Number of years

2. Interest Discounting

Discounting is the direct inverse of compounding. It calculates the value of a future sum of money today (Present Value).

$$PV=\frac{FV}{(1+r{)}^t}$$

Where:

• $PV$ = Present Value (value today)
• $FV$ = Future Value (amount to be received in the future)
• $r$ = Annual interest rate (discount rate / rent)
• $t$ = Number of years

3. Bond Pricing

$$P{V}_{\text{bond}}=\sum _{t=1}^T\frac{C}{(1+y{)}^t}+\frac{M}{(1+y{)}^T}$$

Where:

• $C$ = Annual coupon payment
• $M$ = Maturity par value
• $y$ = Market yield to maturity (discount rate)
• $T$ = Years to maturity

Seesaw Effect

When market yield ($y$) goes down, bond price ($P_{\text{bond}}$) goes up. This price sensitivity increases with a longer maturity ($T$) as cash flows are discounted over more compounding periods.