TIME VALUE OF MONEY EXPLAINED paid such as monthly rent payments, car payments,

or they can be money received such as Semi-annual

What’s important about money?
coupon payments from a BOND. Just remember, for
1. How much? (Amount)
a series of cash flows to be considered an annuity,
2. When? (Timing)
the cash flows need to be equal.
 Inflation could tear up one dollar or even more than
ANNUITY DUE
just one dollar.
 Is when payment is made at the beginning of the
 100 today = 105 in one year
payment period. Rent for example where you are
100 is the present value of the 105 one year from
usually required to pay rent in advance at the first
now.
of every month.
105 is the future value (one year from now) of 100
ORDINARY ANNUITY
today.
 Is a payment that is paid or received at the end of
105=100*(1+5%)1
the period. An example of an ordinary annuity
Future value=PV*(1+r) n
would be a coupon payments made from bonds.
Present Value=FV/(1+r) n
Usually bonds will make a semi-annual coupon
 Time value of money is also the underlying principle
payments at the end of every 6 months.
for concepts such as Net Present Vale and Internal
rate of return.
PRESENT VALUE
 Is today’s value of money from some point in the
Interest – a rental fee to borrow money.
future.
FV
COMPOUND INTEREST FORMULA: PV= n
 Interest that is paid not only on the principal of a (1+i)❑
loan or deposit, but also on the accumulated I=Discount Rate
interest from previous periods of the loans or N=number of periods until FV is received.
deposit
 Interest on PRINCIPAL & ACCUMULATED INTEREST INTRAYEAR COMPOUNDING INTEREST
FORMULA: FV = PV x (1 + i)n  Is when interest is compounded more frequently
i=interest paid than one time per year. This means that there are
n=number of periods multiple compounding periods per year.
Annual Interest Rate/Number of Compounding Periods
SIMPLE INTEREST per Year
 Interest that is paid only on the principal of a loan, e.g. Semi-annual Compounding = Annual Interest Rate/2
and not on any interest from previous periods of Monthly Compounding Interest Rate = Annual Interest
the loan or deposit. Rate/12
 Interest on PRINCIPAL
FORMULA: Initial Investment x (1 + (Interest Rate x PERPETUITY
Number of Periods))  Is a fixed cash flow received over an indefinite
number of periods. For example, if someone were
FUTURE VALUE to received 1000 per month until they died, that
 Is what a dollar today will be worth in the future. would be a perpetuity.
This is because of the interest that dollar can earn Present Value of Perpetuity=Cash Flow/Interest Rate
over time. 1000 per year forever with an available interest rate of
FORMULA: FV = PV x (1 + i)n 5%
i=interest paid 1000/0.05=20,000
n=number of periods 1000
(.05)=238,095.24
ANNUITY 12
 Is a series of equal payments that are either paid to
you or paid from you. Annuities can be CASH FLOWS