Page 33 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 2: Time Value of Money

Notes
Example: Take the above problem as it is and calculate doubling period.
Solution:
Dp = 0.35 + 69 / 10 = 7.25 years.

Effective Rate of Interest in Case of Doubling Period
Sometimes investors may have doubts as to what is the effective interest rate applicable, if a
financial institute pays double amount at the end of a given number of years.
Effective rate of interest can be defined by using the following formula.
(a) In case of rule of 72
ERI = 72 per cent Doubling period (Dp)
where,
ERI = Effective rate of interest.
Dp = Doubling period.

Example: A financial institute has come with an offer to the public, where the institute
pays double the amount invested in the institute by the end of 8 years. Mr. A, who is
interested to make a deposit, wants to know the affective rate of interest that will be
given by the institute. Calculate.

Solution:
ERI = 72 ÷ Dp = 72 ÷ 8 years = 9 per cent
(b) In case of rule of 69
69
ERI = + 0.35
Dr
Example: Take the above example:
69
ERI = + 0.35
8 years
= 8.98 per cent or 9 per cent

Self Assessment
Fill in the blanks:
13. Compound growth rate can be calculated with the formula- …………………

14. To get doubling period 72 is divided by …………rate
15. …………..period is the time required, to double the amount invested at a given rate of
interest.



Case Study Case: Comparing Mortgage Alternatives

he application of the time value of money principles can help you make decisions on
Tloan alternatives. This exercise requires you to compare three mortgage alternatives
Contd...

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