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Chapter 03 The Time Value of Money
Chapter 03 The Time Value of Money
─ COMPOUND INTEREST
─ Implies that interest paid (earned) on a loan
(an investment) is periodically added to the
principal
─ Interest is earned on interest as well as the
initial principal
─ Formulae for a single future amount:
FV = P × (1 + i)n
Future-Value Interest Factor 2
3
The Concept of Interest
─ Simple Interest
─ Interest paid (earned) on only the original amount
borrowed (lent)
─ Formulae: I=P×i×n
─ Future Value (Terminal Value)
─ Value at some future time of a present amount of
money, or a series of payments, evaluated at a given
interest rate
─ The future value of an amount for any simple interest
rate:
FV = P + I = P + (P × i × n)
= P [ 1 + (i × n)]
The Concept of …
─ Present Value
─ The current value of a future amount of money, or a
series of payments, evaluated at a given interest rate
─ Formulae: Rearrangement of the previous formulae
FV = PV [ 1 + (i × n)] → PV = FV/ [ 1 + (i × n)]
─ COMPOUND INTEREST
─ Implies that interest paid (earned) on a loan (an
investment) is periodically added to the principal
─ Interest is earned on interest as well as the initial
principal
─ Formulae for a single future amount:
FV = P × (1 + i)n 5
16
Present Value of an Ordinary…
−Present Value of an Ordinary Annuity, PVOA
[1 – (1 + i)-n] PV Interest Factor for
PVOA = R an Annuity
i
23