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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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Interest Rates in Textbook Theory

You probably were first introduced to the time value of money in college or in a job training program using equations such as these:

image

where FV = future value, PV = present value, i = interest rate per time period, and N = number of time periods to maturity.

The two equations are the same, of course, and merely are rearranged algebraically. The future value is the present value moved forward along a time trajectory representing compound interest over the N periods; the present value is the future value discounted back to day zero at rate i per period.

In your studies, you no doubt worked through many time-value-of-money ...

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