Time Value of Money

•The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount 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 referred to as present discounted value.

TVM formula takes into account the following variables:

•FV = Future value of money
•PV = Present value of money
•i = interest rate
•n = number of compounding periods per year
•t = number of years
•Based on these variables, the formula for TVM is:
•FV = PV x (1 + (i / n)) ^ (n x t)

What is Simple Interest?

•Interest – A rental fee to borrow money
•Simple interest is when the interest received or paid is based solely on the amount of money that was initially invested. Therefore, the interest earned each period or year will be the same.
•Simple interest formula
Initial investment x (1 + (interest rate x number of periods))

Compound Interest

•Compound interest is much different than simple interest. Compound interest is the kind of interest you would like to receive in an investment but definitely would not want to pay. Why? Because the interest rate is based on the balance of the investment when it is calculated, not the initial investment. What this means is that interest is being earned on both the investment, and the interest earned from previous periods.

Compound Interest





161.05 =  $100 x (1+.1) ^5


Future Value

•Future value is what a dollar today will be worth in the future. This is because of the interest that dollar can earn over time, therefore making it more valuable in the future.



The Future Value Formula



Future Value of a $1,000 Corporate Bond
Yield = 10%
Number of Periods = 10

FV = $1,000 x (1 + .1) ^10

FV = $2593.74

What is an Annuity?

•An annuity is a series of equal payments that are either paid to you of paid from you. Annuities can be Cash Flow’s paid such as monthly rent payments, car payments, or they can be money received such as Semi-Annual coupon payments from a Bond. Just remember, for a series of cash flows to be considered an annuity, the cash flows need to be equal.
•Annuity Due: An annuity due is when payment is made at the beginning of the payment period. Rent for example where you are usually required to pay rent in advance at the first of the month.
•Ordinary Annuity: An ordinary annuity is a payment that is paid or received at the end of the period. An example of an ordinary annuity would be a coupon payment made from bonds. Usually bonds will make semi-annual coupon payments at the end of every six months

Present Value

•Present value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.
•PV is also referred to as the "discounted value." The basis is that receiving $1,000 now is worth more than $1,000 five years from now, because if you got the money now, you could invest it and receive an additional return over the five years.
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•The money today is worth more than the same money tomorrow because the passage of time has financial value attached to it and rewards or costs are demanded for owning or using today's money. Future value can relate to future investment cash inflows from investing today's money or future payment outflows from borrowing today's money.
•Present value provides a basis for assessing the fairness of any future financial benefits or liabilities. For example, a future cash rebate discounted to present value may or may not be worth having a potentially higher purchase price. The same financial calculation applies to 0% financing when buying a car. Paying some interest instead on a lower sticker price may work out better for the buyer than paying zero interest on a higher sticker price. Paying mortgage points now in exchange for lower mortgage payments later makes sense only if the present value of the future mortgage savings is greater than the mortgage points paid today.

Present Value Formula







Present Value of a Cash Flow Series





















Última modificación: martes, 14 de agosto de 2018, 08:41