Module 2.1: Introduction to Financial Mathematics, Risk and Return

“A bird in the hand is worth two in the bush”

Introduction
In Module 2.1, the concept of the time value of money is introduced, that is, a dollar today is worth more than a dollar received a year from now. If we are to logically compare projects and financial strategies, we must either move all dollar flows back to the present or out to some common future date. To a regulator, it is important to know the value of the project and the time value of the project, both currently and in the future. The regulators should also understand that a delay in approval of a proposed telecommunications projects may adversely affect the investment and the future cash flow of the telecommunications companies.

Important Learning Terms

• Compound Interest Rate
• Present Value
• Future Value
• Annuity
• Annuity Due
• Perpetuity
• Uneven Cash Flow

Important Notations Used in this Module

The following notations are used throughout Module 2.1:

• FV = the future value of a single amount invested today
• PV = the present value of a single amount sum to be received in the future
• i = the market rate of interest
• n = the number of years
• m = the number of compound periods per year
• FVIFi,n = future value interest factor
• PVIFi,n = present value interest factor
• FVA = future value of an ordinary annuity
• FVAD = future value of an annuity due
• PVA = present value of an ordinary annuity
• PVAD = present value of an annuity due
• PVP = present value of a perpetuity
• PVUCF = present value of uneven cash flows
• PMT = an equal cash flow, payment, or instalment