Python Basics
(1+r)^n
fv: fture value
r : discount periodic rate
n : number of periods
Example #1 >>>pv_f(100,0.1,1)
90.9090909090909
Example #2: >>>pv_f(r=0.1,fv=100,n=1)
90.9090909090909
"""
return fv/(1+r)**n
The comments or explanations are included in a pair of three double quotation
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
marks (""" and """). The indentation within a comment is not consequential. When
compiling, the underlying software will ignore all comments. The beauty of those
comments is that we can use help(pv_f) to see them, as illustrated here:
In Chapter 2, Introduction to Python Modules, we will show how to upload a financial
calculator written in Python, and in Chapter 3, Time Value of Money, we will explain
how to generate such a financial calculator.
Python loops
In this section, we discuss a very important concept: loop or loops. A loop is used to
2017. Packt Publishing.
repeat the same task with slightly different input or other factors.
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Apply Powerful Finance Models and Quantitative Analysis with Python Account:.
Chapter 1
Python loops, if...else conditions
Let's look at a simple loop through all the data items in an array:
>>>import numpy as np
>>>cashFlows=np.array([-100,50,40,30])
>>>for cash in cashFlows:
... print(cash)
...
-100
50
40
30
One type of data is called a tuple, where we use a pair of parentheses, (), to include
all input values. One feature of a tuple variable is that we cannot modify its value.
This special property could be valuable if some our variables should never be
changed.A tuple is different from a dictionary, which stores data with key-value
pairs. It is not ordered and it requires that the keys are hashable. Unlike a tuple, the
value for a dictionary can be modified.
Note that for Python, the subscription for a vector or tuple starts from 0. If x has a
length of 3, the subscriptions will be 0, 1 and 2:
>>> x=[1,2,3]
>>>x[0]=2
>>>x
>>>
[2, 2, 3]
>>> y=(7,8,9)
>>>y[0]=10
>>>
TypeError: 'tuple' object does not support item assignment
>>>Traceback (most recent call last):
File "<stdin>", line 1, in <module>
>>>type(x)
>>>
<class'list'>
>>>type(y)
>>>
<class'tuple'>
>>>
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Python Basics
Assuming that we invest $100 today and $30 next year, the future cash inflow will be
$10, $40, $50, $45, and $20 at the end of each year for the next 5 years, starting at the
end of the second year; see the following timeline and its corresponding cash flows:
-100 -30 10 40 50 45 20
|--------|---------|--------|---------|----------|--------|
0 1 2 3 4 5 6
What is the Net Present Value (NPV) if the discount rate is 3.5%? NPVis defined as
the present values of all benefits minus the present values of all costs. If a cash inflow
has a positive sign while a cash outflow has a negative sign, then NPV can be defined
conveniently as the summation of the present values of all cash flows. The present
value of one future value is estimated by applying the following formula:
Here,PV is the present value, FV is the future value,R is the period discount rate
and n is the number of periods. In Chapter 3, Time Value of Money, the meaning of
this formula will be explained in more detail. At the moment, we just want to write
annpv_f() function which applies the preceding equation n times, where n is the
number of cash flows. The complete NPV program is given here:
def npv_f(rate, cashflows):
total = 0.0
for i in range(0,len(cashflows)):
total += cashflows[i] / (1 + rate)**i
return total
In the program, we used a for loop. Again, the correct indentation is important for
Python. Lines from 2 to 5 are all indented by one unit, thus they belong to the same
function, called npv_f. Similarly, line 4 is indented two units, that is, after the second
column (:), it belongs to the forloop. The command of total +=a is equivalent to
total=total +a.
For the NPV function, we use a for loop. Note that the subscription of a vector in
Python starts from zero, and the intermediate variable i starts from zero as well.
We could call this function easily by entering two sets of input values. The output
is shown here:
>>>r=0.035
>>>cashflows=[-100,-30,10,40,50,45,20]
>>>npv_f(r,cashflows)
14.158224763725372
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Chapter 1
Here is another npv_f() function with a function called enumerate(). This function
willgenerate a pair of indices, starting from0, and its corresponding value:
def npv_f(rate, cashflows):
total = 0.0
for i, cashflow in enumerate(cashflows):
total += cashflow / (1 + rate)**i
return total
Here is an example illustrating the usage of enumerate():
x=["a","b","z"]
for i, value in enumerate(x):
print(i, value)
Unlike the npv_f function specified previously, the NPV function from Microsoft
Excel is actually a PV function, meaning that it can be applied only to the future
values. Its equivalent Python program, which is called npv_Excel, is shown here:
def npv_Excel(rate, cashflows):
total = 0.0
for i, cashflow in enumerate(cashflows):
total += cashflow / (1 + rate)**(i+1)
return total
The comparisons are shown in the following table. The result from the Python
program is shown in the left panel while the result by calling the Excel NPV function
is shown in the right panel. Please pay enough attention to the preceding program
shown itself and how to call such a function:
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Python Basics
By using a loop, we can repeat the same task with different inputs. For example, we
plan to print a set of values. The following is such an example for a while loop:
i=1
while(i<10):
print(i)
i+=1
The following program will report a discount (or any number of discount rates),
making its corresponding NPV equal zero. Assume the cash flow will be 550, -500,
-500, -500, and 1000 at time 0, at the end of each year of the next 4 years. In
Chapter 3, Time Value of Money, we will explain the concept of this exercise in
more detail.
Write a Python program to find out which discount rate makes NPV equal zero.
Since the direction of cash flows changes twice, we might have two different rates
making NPV equal zero:
cashFlows=(550,-500,-500,-500,1000)
r=0
while(r<1.0):
r+=0.000001
npv=npv_f(r,cashFlows)
if(abs(npv)<=0.0001):
print(r)
The corresponding output is given here:
0.07163900000005098
0.33673299999790873
Later in the chapter, a forloop is used to estimate the NPV of a project.
When we need to use a few math functions, we can import the math module first:
>>>import math
>>>dir(math)
['__doc__', '__loader__', '__name__', '__package__', '__spec__',
'acos', 'acosh', 'asin', 'asinh', 'atan', 'atan2', 'atanh', 'ceil',
'copysign', 'cos', 'cosh', 'degrees', 'e', 'erf', 'erfc', 'exp',
'expm1', 'fabs', 'factorial', 'floor', 'fmod', 'frexp', 'fsum',
'gamma', 'gcd', 'hypot', 'inf', 'isclose', 'isfinite', 'isinf',
'isnan', 'ldexp', 'lgamma', 'log', 'log10', 'log1p', 'log2', 'modf',
'nan', 'pi', 'pow', 'radians', 'sin', 'sinh', 'sqrt', 'tan', 'tanh',
'trunc']
>>>math.pi
3.141592653589793
>>>
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