TIME VALUE OF

MONEY
TOPICS COVERED
Basic terms
Sources of information
1.1. Future value
1.2.Present value
1.3. Future value of an annuity
1.4. Present value of an annuity
1.5. Uneven cash flow streams
1.6. Semiannual and other compounding periods
Tasks for practice lesson
 Sources of information
http://www.smartmoney.com. Finance magazine
produced by the publishers of The Wall Street Journal.
http://www.financialengines.com Considers a wide
range of alternative scenarios that might occur in
finance area.
www.bankrate.com/brm/default.asp Different
interest rates for a variety of purposes, and some
calculators
 BASIC TERMS
 Present value (PV) – the current value of future cash flows discounted
at the appropriate discount rate.
 Future value (FV) refers to the amount of money an investment will
grow to over some period of time at some given interest rate. The
amount an investment is worth after one or more periods.
 Fair (Equilibrium) Value is the price at which investors are indifferent
between buying or selling a security.
 Compounding is the arithmetic process of determining the final value
of a cash flow or series of cash flows when compound interest is
applied.
 Dividend growth model is a model that determines the current price of
a stock as its dividend next period divided by the discount rate less the
dividend growth rate.
 Concept of time value
Money now is worth more than the same amount in
the future.
It can earn interest.
It is more liquid.
Other reasons why present value is preferred to future
value:
Inflation may undermine value in future.
Default risk attached to future receipt.
 PRESRNT VALUE

PV= FV/(1+i)n

PV = present value

FV = future value
 i = interest rate per period
 n = number of interest periods
 FUTURE VALUE

FV=PV*(1+і)n ,
 PV = present value (original principal)
 FV = future value
 i = interest rate per period
 n = number of interest periods
 Tasks for practice lesson
After studying this material you should be to do:
Make a conclusion about how should we compare
interest rates quoted over different time intervals—for
example, monthly versus annual rates?
Explain what is meant by the following statement: “A
dollar in hand today is worth more than a dollar to be
received next year.”