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The Appendix
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Introduction to the Time Value of Money
The Time Value of
Money
Future Value, Single Amount
Annuities
Additional Detail on Present and Future Values
Yield
The Time Value of Money
Valuing Multiple Cash Flows
The Time Value of
Money
(continued)
Present Value, Single Amount
The Time Value of Money > Introduction to the Time Value of Money
Introduction to the Time Value of Money

• Importance of the Time Value of Money
• Defining the Time Value of Money
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/the-time-value-of-money-10/introduction-to-the-time-value-of-money-65
/
The Time Value of Money > Future Value, Single Amount
Future Value, Single Amount

• Multi-Period Investment
• Approaches to Calculating Future Value
• Calculating Future Value
• Single-Period Investment
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/the-time-value-of-money-10/future-value-single-amount-66/
The Time Value of Money > Annuities
Annuities
• Calculating Annuities
• Present Value of Annuity
• Future Value of Annuity
• Annuities
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/the-time-value-of-money-10/annuities-67/
The Time Value of Money > Additional Detail on Present and Future Values
Additional Detail on Present and Future Values

• Loans and Loan Amortization
• Calculating Values for Fractional Time Periods
• The Relationship Between Present and Future Value
• Comparing Interest Rates
• Calculating Values for Different Durations of Compounding Periods
• Calculating Perpetuities
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/the-time-value-of-money-10/additional-detail-on-present-and-future-val
ues-68/
The Time Value of Money > Yield
Yield
• Calculating the Yield of a Single-Period Investment
• Calculating the Yield of an Annuity
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/the-time-value-of-money-10/yield-69/
The Time Value of Money > Valuing Multiple Cash Flows
Valuing Multiple Cash Flows

• Present Value, Multiple Flows
• Future Value, Multiple Flows
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/the-time-value-of-money-10/valuing-multiple-cash-flows-70/
The Time Value of Money > Present Value, Single Amount
Present Value, Single Amount

• The Discount Rate
• Number of Periods
• Calculating Present Value
• Multi-Period Investment
• Single-Period Investment
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/the-time-value-of-money-10/present-value-single-amount-71/
Appendix
Key terms
• accrue To add, or grow.
• amortization This is the process of scheduling intervals of payment over time to pay back an existing debt, taking into account
the time value of money.
• annuity A right to receive amounts of money regularly over a certain fixed period in repayment of a loan or investment (or
perpetually, in the case of a perpetuity).
• annuity A specified income payable at stated intervals for a fixed or a contingent period, often for the recipient's life, in
consideration of a stipulated premium paid either in prior installment payments or in a single payment. For example, a
retirement annuity paid to a public officer following his or her retirement.
• annuity-due An investment with fixed-payments that occur at regular intervals, paid at the beginning of each period.
• annuity-due a stream of fixed payments where payments are made at the beginning of each period
• capitalization The process of finding the future value of a sum by evaluating the present value.
• cash flow The sum of cash revenues and expenditures over a period of time.
• compound interest Interest, as on a loan or a bank account, that is calculated on the total on the principal plus accumulated
unpaid interest.
• compound interest Interest, as on a loan or a bank account, that is calculated on the total on the principal plus accumulated
unpaid interest.
• Compound interest An interest rate applied to multiple applications of interest during the lifetime of the investment.
• compounding period The length of time between the points at which interest is paid.
• discount To find the value of a sum of money at some earlier point in time. To find the present value.
• discount to account for the time value of money
• discount rate The interest rate used to discount future cash flows of a financial instrument; the annual interest rate used to
decrease the amounts of future cash flow to yield their present value.
• discounting The process of finding the present value using the discount rate.
• discounting The process of finding the present value using the discount rate.
• discounting The process of determining how much money paid/received in the future is worth today. You discount future values
of cash back to the present using the discount rate.
• Effective Interest The amount of interest accrued per year after accounting for compounding.
• effective-interest method amortizing a debt according to the effective interest rate paid
• Future Value The value of an asset at a specific date. It measures the nominal future sum of money that a given sum of money
is "worth" at a specified time in the future, assuming a certain interest rate, or more generally, rate of return, it is the present
value multiplied by the accumulation function.
• Future Value (FV) The value of the money in the future.
• growth rate The percentage by which the payments grow each period.
• incremental cash flows the additional money flowing in or out of a business due to a project
• inflation An increase in the general level of prices or in the cost of living.

• interest rate The percentage of an amount of money charged for its use per some period of time. It can also be thought of as
the cost of not having money for one period, or the amount paid on an investment per year.
• interest rate The percentage of an amount of money charged for its use per some period of time. It can also be thought of as
the cost of not having money for one period, or the amount paid on an investment per year.
• Interest Rate (i or r) The cost of not having money for one period, or the amount paid on an investment per year.
• Internal Rate of Return (IRR) The discount rate that will cause the NPV of an investment to equal 0.
• Multi-period investment An investment that takes place over more than one periods.
• net present value the present value of a project or an investment decision determined by summing the discounted incoming
and outgoing future cash flows resulting from the decision
• Net Present Value (NPV) The present value of a project or an investment decision determined by summing the discounted
incoming and outgoing future cash flows resulting from the decision.
• Nominal Interest The amount of interest accrued per year without accounting for compounding.
• ordinary annuity An investment with fixed-payments that occur at regular intervals, paid at the end of each period.
• ordinary repair expense accrued in normal maintenance of an asset
• period The length of time during which interest accrues.

• Periods (t or n) Units of time. Usually one year.
• perpetuity An annuity in which the periodic payments begin on a fixed date and continue indefinitely.
• present value a future amount of money that has been discounted to reflect its current value, as if it existed today
• present value Also known as present discounted value, is the value on a given date of a payment or series of payments made
at other times. If the payments are in the future, they are discounted to reflect the time value of money and other factors such
as investment risk. If they are in the past, their value is correspondingly enhanced to reflect that those payments have been (or
could have been) earning interest in the intervening time. Present value calculations are widely used in business and
economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis.
• Present Value (PV) The value of the money today.
• principal The money originally invested or loaned, on which basis interest and returns are calculated.
• quarter A period of three consecutive months (1/4 of a year).
• simple interest interest paid only on the principal.
• Single-period investment An investment that takes place over one period, usually one year.
• time period assumption business profit or loses are measured on timely basis
• time value of money the value of an asset accounting for a given amount of interest earned or inflation accrued over a given
period
• yield In finance, the term yield describes the amount in cash that returns to the owners of a security. Normally it does not
include the price variations, at the difference of the total return. Yield applies to various stated rates of return on stocks
(common and preferred, and convertible), fixed income instruments (bonds, notes, bills, strips, zero coupon), and some other
investment type insurance products
Compounding Interest
The effect of earning 20% annual interest on an initial $1,000 investment at various compounding frequencies.
Wikimedia. CC BY-SA
http://upload.wikimedia.org/wikipedia/commons/thumb/7/7f/Compound_Interest_with_Varying_Frequencies.svg/800px-Compound_Interest_with_Varying_Frequenci
Fisher Equation
The nominal interest rate is approximately the sum of the real interest rate and inflation.
Wikipedia. "Fisher equation." GNU FDL http://en.wikipedia.org/wiki/Fisher_equation View on Boundless.com
FV of a single payment
The PV and FV are directly related.
Wikipedia. "Time value of money." GNU FDL http://en.wikipedia.org/wiki/Time_value_of_money View on Boundless.com
Percent Change
The percent change in value is the change in value from PV to FV (V2 to V1) divided by PV (V1) times 100%.
Wikipedia. "Percentage change." GNU FDL http://en.wikipedia.org/wiki/Percentage_change View on Boundless.com
Present Value Single Payment

Finding the PV is a matter of plugging in for the three other variables.
The PV and FV are directly related.
Car
Car loans, mortgages, and student loans all generally have compound interest.
Open ClipArt. "Clipart - American Sport Car." Public domain http://openclipart.org/detail/16372/american-sport-car-by-bobocal-16372 View on Boundless.com
Solving for n
This formula allows you to figure out how many periods are needed to achieve a certain future value, given a present value and an interest rate.
Wikipedia. "Compound interest." GNU FDL http://en.wikipedia.org/wiki/Compound_interest View on Boundless.com
Calculating the effective annual rate

The effective annual rate for interest that compounds more than once per year.
Wikipedia. "Effective annual rate." GNU FDL http://en.wikipedia.org/wiki/Effective_annual_rate View on Boundless.com
The FV of multiple cash flows is the sum of the future values of each cash flow.
Time Value of Money

Time value of money requires an understanding of how return rates impact fixed values over time.
Wikimedia. "Economics_of_climate_change_chapter3_discounting_curves.png." CC BY-SA 3.0
https://upload.wikimedia.org/wikipedia/commons/9/99/Economics_of_climate_change_chapter3_discounting_curves.png View on Boundless.com
Compound Interest
Interest is paid at the total amount in the account, which may include interest earned in previous periods.
Wikipedia. "Future value." GNU FDL http://en.wikipedia.org/wiki/Future_value View on Boundless.com
EAR
The Effective Annual Rate is the amount of interest actually accrued per year based on the APR. n is the number of compounding periods of APR per
year.
Wikipedia. "Effective APR." GNU FDL http://en.wikipedia.org/wiki/Effective_APR View on Boundless.com
IRR Example
The setup to find the IRR of the investment with cash flows of -4000, 1200, 1410, 1875, and 1050. By setting NPV = 0 and solving for r, you can find the
IRR of this investment.
Wikipedia. "Internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.com
The FV is related to the PV by being i% more each period.
Sum FV
The PV of an investment is the sum of the present values of all its payments.
FV Periodic Compounding
Finding the FV (A(t)) given the PV (Ao), nominal interest rate (r), number of compounding periods per year (n), and number of years (t).
Wikipedia. "Compound interest." GNU FDL http://en.wikipedia.org/wiki/Compound_interest View on Boundless.com
Simple Interest Formula

Simple interest is when interest is only paid on the amount you originally invested (the principal). You don't earn interest on interest you previously
earned.
Compound Interest

earned.
Compound Interest

earned.
Compound Interest
In this formula, your deposit ($100) is PV, i is the interest rate (5% for Bank 1, 6% for Bank 2), t is time (5 years), and FV is the future value.
EAR with Continuous Compounding

The effective rate when interest compounds continuously.
Wikipedia. "Effective annual rate." GNU FDL http://en.wikipedia.org/wiki/Effective_annual_rate View on Boundless.com
Amortization Schedule Example

This shows the first few installments in the example discussed above (i.e. borrowing $100,000 at 8% interest paid monthly over 30 years).
Wikipedia. "Amortization_table_%28example%29.gif." CC BY-SA 3.0
https://upload.wikimedia.org/wikipedia/commons/a/ac/Amortization_table_%28example%29.gif View on Boundless.com
Annuities Equations
This table is a useful way to view the calculation of annuities variables from a number of directions. Understanding how to manipulate the formula will
underline the relationship between the variables, and provide some conceptual clarity as to what annuities are.
Wikipedia. "Annuities Equations.JPG." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Time_value_of_money#Formula View on Boundless.com
Borrowing and lending

Banks like HSBC take such costs into account when determining the terms of a loan for borrowers.
Geograph. "HSBC Bank Acocks Green 40-11-01 (C) Roy Hughes :: Geograph Britain and Ireland." CC BY-SA http://www.geograph.org.uk/photo/1107226
View on Boundless.com

earned.

earned.
Annual Percentage Yield

The Annual Percentage Yield is a way or normalizing the nominal interest rate. Basically, it is a way to account for the time factor in order to get a more
accurate number for the actual interest rate.inom is the nominal interest rate.N is the number of compounding periods per year.
Wikipedia. "Annual percentage yield." GNU FDL http://en.wikipedia.org/wiki/Annual_percentage_yield View on Boundless.com
Attribution
• Wikipedia. "Cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_capital
• Wiktionary. "discount rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/discount_rate
• Wikipedia. "Discounting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Discounting
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/discounting--2
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/discount
• Wikipedia. "Future value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Future_value
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/periods-t-or-n
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/single-period-investment
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/multi-period-investment
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/ordinary-annuity--2
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/annuity-due--2
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//accounting/definition/ordinary-repair
• OpenStax CNX. "Rupinder Sekhon, Mathematics of Finance. September 17, 2013." CC BY 3.0
http://cnx.org/content/m18905/latest/
• Wiktionary. "compound interest." CC BY-SA 3.0 http://en.wiktionary.org/wiki/compound_interest
• Wikipedia. "Present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Present_value
• Wiktionary. "simple interest." CC BY-SA 3.0 http://en.wiktionary.org/wiki/simple_interest

• Wiktionary. "compound interest." CC BY-SA 3.0 http://en.wiktionary.org/wiki/compound_interest
• Wikipedia. "Cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_capital
• Wikipedia. "Compound interest." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Compound_interest
• Wikipedia. "Fisher equation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Fisher_equation
• Wiktionary. "inflation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/inflation
• Wikipedia. "time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/time%20value%20of%20money
• Wikipedia. "Accounting assumptions." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Accounting_assumptions
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/compounding-period
• Wikipedia. "Amortization." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Amortization
• Wikipedia. "Amortization (business)." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Amortization_(business)
• Wikipedia. "Loan." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Loan
• Wikipedia. "Amortization calculator." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Amortization_calculator
• Wikipedia. "Amortizing loan." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Amortizing_loan
• Wiktionary. "principal." CC BY-SA 3.0 http://en.wiktionary.org/wiki/principal
• Wiktionary. "accrue." CC BY-SA 3.0 http://en.wiktionary.org/wiki/accrue
• Wikipedia. "Perpetuity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Perpetuity
• Wiktionary. "perpetuity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/perpetuity

• OpenStax CNX. "Rupinder Sekhon, Mathematics of Finance. October 11, 2013." CC BY 3.0
• Wikibooks. "Principles of Finance/Section 1/Chapter 3/Applications of Time Value of Money/Annuities." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_3/Applications_of_Time_Value_of_Money/Annuities
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/capitalization
• Wikipedia. "Terminal value (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Terminal_value_(finance)
• Wikipedia. "Perpetuities." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Perpetuities
• Wikipedia. "Time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Time_value_of_money
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/growth-rate
• Wikipedia. "Yield (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_(finance)
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "Annual percentage yield." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Annual_percentage_yield
• Wikipedia. "Annual percentage rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Annual_percentage_rate
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//accounting/definition/effective-interest-method
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/effective-interest
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/nominal-interest

• Wiktionary. "quarter." CC BY-SA 3.0 http://en.wiktionary.org/wiki/quarter
• Wikipedia. "period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/period
• Wikipedia. "Annuity (finance theory)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Annuity_(finance_theory)
• Wikipedia. "Cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_flow
• Wiktionary. "annuity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/annuity
• Wiktionary. "cash flow." CC BY-SA 3.0 http://en.wiktionary.org/wiki/cash_flow
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/future-value-fv
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/present-value-pv
• Wikibooks. "Principles of Finance/Section 1/Chapter 2/Time Value of Money/Introduction." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/Introduction
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/interest-rate-i-or-r
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wiktionary. "yield." CC BY-SA 3.0 http://en.wiktionary.org/wiki/yield
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/internal-rate-of-return-irr
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/net-present-value-npv

• Wiktionary. "interest rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/interest_rate
• Wikipedia. "Investment." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Investment
• Wikipedia. "Return on investment." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Return_on_investment
• Wikipedia. "Payback period." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Payback_period
• Wikipedia. "Rate of return." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Rate_of_return#Returns_over_multiple_periods
• Wikipedia. "Time value of money." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Time_value_of_money
• Wikipedia. "Future value." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Future_value
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wiktionary. "net present value." CC BY-SA 3.0 http://en.wiktionary.org/wiki/net_present_value
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/discount
• Wikipedia. "Future Value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Future%20Value
• Wikipedia. "Effective annual rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Effective_annual_rate
• Wikipedia. "Effective annual rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Effective_annual_rate

• Wiktionary. "interest rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/interest_rate
• OpenStax CNX. "Rupinder Sekhon, Mathematics of Finance. September 17, 2013." CC BY 3.0
• Wikipedia. "Present value." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Present_value
• Wikipedia. "Annuity (American)." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Annuity_(American)
• Wikipedia. "Life annuity." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Life_annuity
• Wikipedia. "Fixed annuity." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Fixed_annuity
• Wikipedia. "TIme value of money." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Time_value_of_money#Formula
• Wikipedia. "Annuity." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Annuity

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Additional Detail on Present and Future Values

The Time Value of Money

The Time Value of Money

Introduction to the Time Value of Money

Future Value, Single Amount

Additional Detail on Present and Future Values

Valuing Multiple Cash Flows

Present Value, Single Amount

• inflation An increase in the general level of prices or in the cost of living.

• period The length of time during which interest accrues.

Present Value Single Payment

Calculating the effective annual rate

Time Value of Money

Simple Interest Formula

Simple Interest Formula

Simple Interest Formula

EAR with Continuous Compounding

Amortization Schedule Example

Borrowing and lending

Simple Interest Formula

Simple Interest Formula

Annual Percentage Yield

• Wiktionary. "simple interest." CC BY-SA 3.0 http://en.wiktionary.org/wiki/simple_interest

• Wiktionary. "perpetuity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/perpetuity

• Wikipedia. "Future value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Future_value

• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/net-present-value-npv

• Wikipedia. "Time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Time_value_of_money

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