1. Time Value of Money (TVM) & Interest
These core formulas calculate how investment values change over time due to interest rates.
| Concept | Formula | Variables Defined |
|---|---|---|
| Simple Interest | I = P * r * t | I = Interest Amount, P = Principal, r = Annual Interest Rate, t = Time (years) |
| Compound Interest (Future Value) | FV = P * (1 + r/n)^(n*t) | FV = Future Value, P = Principal, r = Annual Rate, n = Compounding periods/year, t = Time (years) |
| Present Value (PV) | PV = FV / (1 + r/n)^(n*t) | PV = Present Value (Discounted value of future cash) |
| Effective Annual Rate (EAR) | EAR = (1 + r/n)^n - 1 | Converts a nominal interest rate to the actual rate earned due to compounding. |
| Rule of 72 (Doubling Time) | Years to Double ≈ 72 / R | R = Interest rate as a whole number (e.g., 6 for 6%) |
2. Banking, Loans, and Mortgages
Formulas used by commercial banks to calculate loan payments, yields, and structural liquidity.
| Concept | Formula | Variables Defined |
|---|---|---|
| Equated Monthly Installment (EMI) | P * r * (1+r)^n / ((1+r)^n - 1) | P = Loan Amount, r = Monthly Interest Rate (Annual Rate / 12), n = Number of monthly installments |
| Loan-to-Value (LTV) Ratio | LTV = (Loan Amount / Appraised Property Value) * 100 | Expressed as a percentage to assess lending risk. |
| Debt Service Coverage Ratio (DSCR) | DSCR = Net Operating Income / Total Debt Service | Measures a borrower's ability to produce enough cash to cover loan payments. |
| Net Interest Margin (NIM) | NIM = (Investment Returns - Interest Expenses) / Average Earning Assets | Tracks a bank's structural profitability from its lending activities. |
3. Corporate Finance & Financial Statement Analysis
Key metrics used by analysts, banks, and investors to evaluate business performance and creditworthiness.
| Concept | Formula | Variables Defined |
|---|---|---|
| Return on Investment (ROI) | ROI = (Net Profit / Cost of Investment) * 100 | Measures the efficiency or profitability of an investment. |
| Return on Equity (ROE) | ROE = Net Income / Shareholder's Equity | Measures how effectively management is using investors' capital. |
| Current Ratio (Liquidity) | Current Ratio = Current Assets / Current Liabilities | Determines a company's ability to cover short-term obligations. |
| Quick Ratio (Acid-Test) | Quick Ratio = (Current Assets - Inventory) / Current Liabilities | A stricter liquidity test excluding hard-to-liquidate inventory. |
| Debt-to-Equity Ratio | D/E = Total Liabilities / Total Shareholders' Equity | Evaluates a company's financial leverage and risk profile. |
| Earnings Per Share (EPS) | EPS = (Net Income - Preferred Dividends) / Outstanding Common Shares | Indicates profitability allocated to each outstanding share of common stock. |
4. Investment Valuation & Capital Budgeting
Advanced metrics used to appraise long-term projects, investments, and assets.
| Concept | Formula | Variables Defined |
|---|---|---|
| Net Present Value (NPV) | NPV = ∑ [CF_t / (1 + r)^t] - Initial Investment | CF_t = Cash flow at time t, r = Discount rate, t = Time period |
| Weighted Average Cost of Capital (WACC) | WACC = (E/V * Re) + (D/V * Rd * (1 - Tc)) | E = Equity, D = Debt, V = E + D, Re = Cost of Equity, Rd = Cost of Debt, Tc = Corporate Tax Rate |
| Capital Asset Pricing Model (CAPM) | Re = Rf + β * (Rm - Rf) | Rf = Risk-free rate, β = Beta (systematic risk), Rm = Expected market return |