CAED102: FINANCIAL MARKETS  

ACTIVITY #5: TIME VALUE OF MONEY ​(30 pts)  

Name: ​BOGNALOS, Criscel Anne V.   Section: A​C21 
INSTRUCTIONS:  
Answer the following questions and cite your corresponding source/s.  
1. What is time value of money all about? ​(2 pts)  
Answer:  
● The ​time value of money​ (TVM) is the concept that money you have now is worth more than 
the identical sum in the future due to its potential earning capacity.  
● This core principle of finance holds that provided money can earn interest, any amount of money 
is worth more the sooner it is received.  
● TVM is also sometimes referred to as present discounted value. 
● Time value of money is the idea that money that is available at the present time is worth ​more 
than the same amount in the future. It is also the underlying principle for concepts such​ ​as Net 
Present Value and Internal Rate of Return.  
Source/s:  
https://www.investopedia.com/terms/t/timevalueofmoney.asp#:~:text=The%20time%
20value%20of%20money%20(TVM)%20is%20the%20concept%20that,the%20sooner%20it%20i
s%20received​. 
 
https://www.youtube.com/watch?v=gkp-7yhfreg  

​ hat is simple interest?  

2. ​(4 pts) W
a. Define simple interest. ​(1 pt)  
SIMPLE INTEREST   
➢ interest  is  paid only on the initial principal of a loan or deposit and not 
on any interest that is earned during the term of the loan or deposit. 
➢ In  simple  terms,  simple  interest  is  interest  on  principal  or  original 
amount of loan and nothing else.  
➢ a quick and easy method of calculating the interest charge on a loan. 
b. When do you use it? ​(1 pt)  
➢ Simple interest ​is​ ​usually used and applied to automobile loans or 
short-term personal loans.  
c. What is its formula? ​(1 pt)  
Simple interest is determined by multiplying the daily interest rate by the principal by the 
number of days that elapse between payments. 

 
But, in case that you need to find the total accrued amount for a loan with simple 
interest, the formula is: 

 
where:  
A = ​Total Accrued Amount (principal + interest)  
P = ​principal amount / Initial Investment  
r = ​annual interest rate  
t = ​time (in years)  

 
 d. Give one sample problem. ​(1 pt)  
Alicia bought a luxury bag for $70, 000. She took a $30,000 loan from a bank at an 
interest rate of 10% per year for a 5-year period. What is the total amount (interest and 
loan) that she would have to pay the bank at the end of 3 years? 
Solution : 
Simple Interest = 30,000 × 10% × 5 = 15,000 
At the end of 5 years, she would have to pay 
$30,000 + $15,000 = $45,000 
Source/s:  
https://www.youtube.com/watch?v=gyiiqUQgEeA  
 
https://www.investopedia.com/terms/s/simple_interest.asp  
 
Simple Interest​. 
 
https://www.investopedia.com/articles/investing/020614/learn-simple-and-compo 
und-interest.asp  

​ hat is Present Value?  

3. ​(4 pts) W
a. Define Present Value. ​(1 pt)  
➢ Present value (PV)​ ​is the current value of a future sum of money or​ ​stream of 
cash flows given a specified rate of return.  
➢ Present value states that an amount of money today is worth more than the same 
amount in the future. 
➢ Present value shows that money received in the future is not worth as much as an 
equal amount received today.​ 
➢ Calculating present value involves assuming that a rate of return could be earned 
on the funds over the period. 

b. When do you use it? ​(1 pt)  

➢ It is frequently used in annuity contracts together with future value.  
 
c. What is its formula? ​(1 pt)  

 
d. Give one sample problem. ​(1 pt)  
Alexia owes a total of $5,000 which includes 10% interest for the three years she 
borrowed the money. How much did he originally borrow? 

Solution:  
5000 / (1 + 0.10) 3 

Answer: 
$3,756.57 
 
Source/s: 
https://www.investopedia.com/terms/p/presentvalue.asp  

 
5. What is compound interest? ​(1 pt)  
➢ Compound interest (or compounding interest) is interest calculated on the initial principal, 
which also includes all of the accumulated interest from previous periods on a deposit or 
loan. 
➢ Compound interest is calculated by multiplying the initial principal amount by one plus 
the annual interest rate raised to the number of compound periods minus one. 
Source/s: 
https://www.investopedia.com/terms/c/compoundinterest.asp#:~:text=Compound%20
interest%20(or%20compounding%20interest,accumulated%20interest%20fr
om%20previous%20periods. 
 

​ hat is Future Value?  

6. ​(4 pts) W
a. Define Future Value. ​(1 pt)  
➢ Future value ​is what a dollar today will be worth in the future. 
➢ Future value​ ​is the dollar amount that will accrue over time when that sum is 
invested.  
 
b. When do you use it? ​(1 pt)  
○ It is frequently used in annuity contracts together with present value.  
○ T​he  FV  ​calculation  allows  investors  to  predict,  with  varying  degrees  of  accuracy,  the 
amount​ ​of profit that can be generated by different investments. 
 
c. What is its formula? ​(1 pt)  
There are two formulas to be used depending on the type of interest.  
➢ The first one is used to compute the future value with simple interest: 

 
➢ While, the second one is used for compounding interest 

 
d. Give one sample problem. ​(1 pt)  
➢ Aimee invests $5,000 for five years with an interest rate of 12%. The future value would be 
$1,500. 
=$5,000 x [1+(0.12 x 5)] 
=$5,000 x 1.6 
=8,000 

➢ What is the future value of $21,000 compounded at 6% annually for five years: 
= $21,000 (1 + 0.06)​5   
= $10,000 (1.3382255776) 
= $13,382.2558 
 
 
 
 Source/s:  
➢  
https://www.youtube.com/watch?v=m3azU7gYHc0 
 
https://www.investopedia.com/terms/f/futurevalue.asp  

​ hat is Present Value of Ordinary Annuity?  

7. ​(4 pts) W
a. Define Present Value of Ordinary Annuity. ​(1 pt)  
➢ T​he present value of an annuity is the current value of future payments from 
an annuity, given a specified rate of return, or discount rate.  
b. When do you use it? ​(1 pt)  
➢ You  can  use  a  present  value  calculation  to  determine  whether  you'll  receive 
more  money  by  taking  a  lump  sum  now  or  an  annuity  spread  out  over  a 
number of years.  
c. What is its formula? ​(1 pt)  

 
d. Give one sample problem. ​(1 pt)  
Mr.  Mohammad  Ali  has  received  a  job  offer  from  a  large  investment  bank  as  an 
accountant.  His base salary will be $35,000 constant to date of retirement.  He will receive 
his  first  annual  salary  payment  one  year  from  the  day  he  begins  to  work.  In addition, he 
will  get  an  immediate  $10,000  bonus  for  joining  the  company.  Mr.  Ali  is  expected  to 
work for 25 years. What is the present value of the offer if the discount rate is 12 percent? 

Solution:  

 
PVA25 = 274,509.87 
Bonus = 10,000 
Answer: $284,509.87 

 
 
Source/s:  
https://www.investopedia.com/terms/p/present-value-annuity.asp  
 
​ hat is Future Value of Ordinary Annuity?  
8. ​(4 pts) W
a. Define Future Value of Ordinary Annuity. ​(1 pt) 
➢ Future value​ is the value of a sum of cash to be paid on a specific date in the future. 
Therefore, the formula for the future value of an ordinary annuity refers to the value on a 
specific future date of a series of periodic payments, where each payment is made at the 
end of a period. 

b. When do you use it? ​(1 pt)  

➢ Because  of  the  ​time  value  of  money​, money received or paid out today is w​orth more 
than  the  same  amount  of  money  will  be  in  the  future.  That's  because  the  ​money can 
be invested and allowed to grow over time.  
 c. What is its formula? ​(1 pt)  

➢ The formula for calculating the future value of an ordinary annuity (where a series of 
equal payments are made at the end of each of multiple periods) is: 

P = PMT [((1 + r)n - 1) / r] 

Where: 
P = The future value of the annuity stream to be paid in the future 
PMT = The amount of each annuity payment 
r = The interest rate 
n = The number of periods over which payments are made 

d. Give one sample problem. ​(1 pt)  

If at the end of each month, a saver deposited $100 into a savings account that paid 6% 
compounded monthly, how much would he have at the end of 10 years? 

A = $100 

r = 6% per year compounded monthly, which = .5% interest per month = .005 

n = the number of compounding time periods = 120 in 10 years. 

Substituting these values into the equation for the future value of an ordinary annuity: 

100 * ((1+.005)120 -1)/.005 = $16,387.93 

 
Source/s:  
https://www.investopedia.com/terms/f/future-value-annuity.asp  
 
https://www.accountingtools.com/articles/what-is-the-formula-for-the-future-value-of-a
n-ordinary-annu.html#:~:text=Future%20value%20is%20the%20value,the%20end%20of%20a
%20period​. 
 
https://www.google.com/amp/s/thismatter.com/money/investments/present-value-fut
ure-value-of-annuity.amp.htm 
 
 
​ hat is Present Value of Annuity Due?  
9. ​(4 pts) W
a. Define Present Value of Annuity Due. ​(1 pt)  
➢ T​he  present  value  of  an  annuity  due (PVAD) is calculating the value at the 
end of the number of periods given, using the current value of money. 
➢ Another  way  ​to  think  of  it  is how much an annuity due would be worth when 
payments are​ ​complete in the future, brought to the present.  
b. When do you use it? ​(1 pt)  
➢ This can be used in calculating the present value of your future rent payments 
as specified in your lease.  
➢ The​ present value​ calculation for an ordinary annuity is used to determine the total 
cost​ of an annuity if it were​ to be paid right now 

 
 c. What is its formula? ​(1 pt)  

The formula for calculating the present value of an ordinary annuity is: 

P = PMT [(1 - (1 / (1 + r)n)) / r] 

Where: 
P = The present value of the annuity stream to be paid in the future 
PMT = The amount of each annuity payment 
r = The​ ​interest rate 
n = The number of periods over which payments are to be made 
 

d. Give one sample problem. ​(1 pt)  

Mr.  Khaild  will  receive  $8,500  a  year  for  the  next  15  years  from  her  trust.  If  a 7 percent 
interest  rate  is  applied,  what  is  the  current  value  of  the  future  payments  if  first  receipt 
occurs today? 

Solution:  

 
Answer: $82,836.48 

 
Source/s:  
 
https://www.thebalancesmb.com/how-do-you-calculate-the-present-value-of-an-an 
nuity-due  

https://corporatefinanceinstitute.com/resources/knowledge/finance/annuity-due/ 
 
https://www.investopedia.com/retirement/calculating-present-and-future-value-of-a 
nnuities/  
 
https://www.accountancyknowledge.com/present-value-of-annuity-problems-and-s
olutions/ 
 
 
​ hat is Future Value of Annuity Due?  
10. ​(4 pts) W

a. Define Future Value of Annuity Due. ​(1 pt)  

T​he future value of an annuity due refers to the value on a specific  
future date of a series of periodic payments, where each payment is made at  
the beginning of a period.  

b. When do you use it? ​(1 pt)  

It is used by financial institutions to determine the cash flows  
associated with their products.  

c. What is its formula? ​(1 pt)  

Where:  
● ​PMT ​– ​Periodic cash flows  
● ​r ​– ​Periodic interest rate, which is equal to the annual rate divided by the total number of payments per year 
● ​n ​– T​he total number of payments for the annuity due  
 d. Give one sample problem. ​(1 pt)  
If the saver deposited the money at the beginning of the month instead of the end, then there 
will be an additional amount of money = A(1 + r)n - A = 100(1.005)120 -100 = $81.94. 
Source/s:  
https://www.accountingtools.com/articles/what-is-the-formula-for-the-future-value 
-of-an-annuity-due.html  
 
https://www.google.com/amp/s/thismatter.com/money/investments/present-value-future-valu
e-of-annuity.amp.htm