Time Value of Money

Simple Interest

Maturity Value = Principal + Interest

Interest = P x R x T

MV = P(1+RT)
 Simple Interest

• How much should Phoebe pay for a 13,000

loan if she is charged with an interest of 12 ¼%
after 9 months?
 Solution
• Maturity Value = Principal + Interest
= P(1+RT)

MV = 13,000 ( 1+ 0.1224 x 9/12)

= 14,194.375
 Simple Interest
• Monica extended 16,000 as a loan amount to
Rachel at 9.5% simple interest. Find the total
collectible amount by Monica 8 months after
the extension of the credit.
 Solution
• Maturity Value = Principal + Interest
= P(1+RT)

MV = 16,000 ( 1+ 0.095 x 8/12)

= 17,013.33
 Simple Interest
• Chandler deposited 15,000 in a local bank at
20% simple interest. How long will it take the
amount to triple itself?
 Solution
• Maturity Value = Principal + Interest
= P(1+RT)

45,000 = 15,000 ( 1+ 0.2 x T )

T = 10 years
 COMPOUND INTEREST
• Compound
  amount = Principal/Present Value (
1 + periodic interest)^total number of
compounding periods

C=P
 COMPOUND INTEREST
• On January 1, 2011, Ross borrowed 10,000 at
12% compounded quarterly for 1 year.
Compute the compound amount and
compound interest.
 Solution
•  Compound amount = P
= 10,000 ( 1 + .12/4)^4
= 11,255.09

Compound interest = 11,255.09 – 10,000

= 1,255.09
• Joey invested 15,000 for 8 years and 7 months
at 10% compounded quarterly. Determine the
compound amount using:

1. Direct substitution method

2. Practical method
 Solution:
•  Direct substitution method:

C = 15,000 (1+.10/4)^ 103/3*

= 35, 016.87

* Compounding period = 4
• Practical
  Method
C = 15,000 (1.025)^34
= 34,729.83

MV = P(1+RT)
MV = 34, 729.83 (1+0.025x )
= 35, 019.25
• Gunther invested 10,000 for 20 years. The
terms are as follows: in the first 5 years, the
interest rate is 10% compounded quarterly;
then it will be 12% compounded semi-
annually for the next 7 years; and 14%
compounded annually for the remaining
years. Determine the compound amount at
the end of 20 years.
 Solution
• For the first 5 years:
C = 10,000(1 + .10/4)^20
= 16,386.164 (compound amount)

• For the next 7 years:

C = 16,386.164(1+.12/2)^14
= 37, 047.543
• For the remaining years:

C = 37,047.543(1 + .14)^8
= 105, 681.1318
 Present Value
• Answers
  the question “What is the value of a
future amount today or what is the amount of
money worth today?”

PV = C
• Janice would like to buy a refrigerator worth
60,000 after 2 years. She is planning to deposit
an amount to the bank that earns an interest
of 8% compounded quarterly. What amount
should she deposit now to accumulate
60,000?
 Solution
•  PV = C
= 60,000 ( 1 + 0.02)^-8
= 51, 209.42
 DIFFICULT QUESTION
Joey owes Chandler the following debts: 45,000 at 12%
compounded quarterly due in 4 years and 90,000 at 9%
compounded semi-annually due in 10 years. They
agreed that to settle these 2 obligations, Joey will make
the following payments:

- 90,000 at the end of 3 years and the final payment

shall be made at the end of 8 years
- Find the final value of the final payment, if money is
worth 10% compounded quarterly
 Solution

45,000 at 12% 90,000 at 9%

Pay 90,000 compounded Final payment X compounded
quarterly semi-annually

0 1 2 3 4 5 6 7 8 9 10
 Get the MV of the debts
• 45,000 at 12% compounded quarterly due in 4 years

MV = 45,000 (1+.12/4)^16
= 72, 211.79

• 90,000 at 9% compounded semi-annually due in 10

years

MV = 90,000 (1+.09/2)^20
= 217, 054.26
Jack owes Judy 40,000 at 8% compounded quarterly
due in 2 years and 80,000 at 6% compounded bi-
monthly due in 4 years. Judy agrees that Jack will
make 2 payments to settle those obligations as
follows:

- The first payment shall be made at the end of 5 years

and the second payment shall be made at the end of
7 years, provided that the final payment shall double
the amount of the 1st payment.
- Find the amounts of the two payments if money is
worth 10% compounded quarterly