Time Value of Money - 2124 Words

Time Value of Money: Simple Interest versus Compound Interest Outline I. Applications of Time Value of Money 1.1 Example One 1.2 Example Two 2. Interest 2.1 What is Interest? 2.2 Three Variables of Interest 1. Principal 2. Interest Rate 3. Time 2.3 Why is Interest Charged? 3. Simple Interest 3.1 What is Simple Interest? 3.2 Simple Interest Formula 4. Compound Interest 4.1 What is Compound Interest? 4.2 Compound Interest Formula 5. Compound Interest Tables 1. Future Value of $1 2. Present Value of $1 3. Present Value of an Ordinary Annuity of $1 4. Present Value of an Annuity due 5. Present Value of a Deferred Annuity 6. Conclusion 7. References†¦show more content†¦Metal loans were based on weight. Before the concept of money came in existence, loans of grain and silver served as a bargaining tool to facilitate trade. Silver was used in town and grain was used in the country. Under the laws of usury, the collection of interest was forbidden. Today, interest rates are very closely watched market indicators. Interest rates have a dramatic effect on finance and economics. Interest As we discussed earlier, after investing $100 in a savings account at your local bank yielding 6% annually, you will have $106. The $6 earned is the interest on the initial deposit of $100. Interest is the â€Å"rent† paid for the use of money for some period of time, (Spiceland, Sepe, Nelson, pp. 322). Interest is also a surcharge on the repayment of borrowed money, the return derived from an investment, or the right to claim in a corporation such as that of creditor or owner. When we borrow money, interest is typically paid to the lender as a percentage of the principal or the amount owed to the lender, so, the larger the principal, the larger the dollar amount of principal. The interest rate is the percentage of the principal that is paid as a fee over a certain period of time (typically one month or year). If interests are high, the larger the amount of interest received. And the longer the funds remain in an account, the larger the dollar amount of interest. Becau se the bank is using the deposited funds, theShow MoreRelatedTime Value of Money1028 Words   |  5 Pagestoward understanding the relationship between the value of dollars today and that of dollars in the future is by looking at how funds invested will grow over time. This understanding will allow one to answer such questions as; how much should be invested today to produce a specified future sum of money? Time Value of Money In most cases, borrowing money is not free, unless it is a fiver for lunch from a friend. Interest is the cost of borrowing money. An interest rate is the cost stated as a percentRead MoreTime Value of Money1033 Words   |  5 PagesTime Value of Money (TVM), developed by Leonardo Fibonacci in 1202, is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM is based on the concept that a dollar today is worth more than a dollar in the future. That is mainly because money held today can be invested and earn interest. A key concept of TVM is that a single sum of money or a series of equal,Read MoreTime Value of Money967 Words   |  4 PagesTime Value of Money The time value of money relates to many activities and decision in the financial world. â€Å"Understanding the effective rate on a business loan, the mortgage payment in a real estate transaction, or the true return on an investment depends on understanding the time value of money† (Block, Hirt, 2005). The concept of time value of money helps determine how financial assets are valued and how investors establish the rates of return they demand. Many different types of companiesRead MoreTime Value of Money2180 Words   |  9 PagesFinance Ââ€" Time Value of Money We earn money to spend it and we save money to spend it in the future. However, for most people spending money in the present time is more desirable since the future is unknown. We can gratify the desire to spend money today rather than in the future by knowing the basic law in finance Ââ€" time value of money. This means that a dollar today is worth more than a dollar at some time in the future. Unfortunately, people very often want to buy things at the present time whichRead MoreTime Value of Money3904 Words   |  16 PagesTime Value of Money Problems 1. What will a deposit of $4,500 at 10% compounded semiannually be worth if left in the bank for six years? a. $8,020.22 b. $7,959.55 c. $8,081.55 d. $8,181.55 2. What will a deposit of $4,500 at 7% annual interest be worth if left in the bank for nine years? a. $8,273.25 b. $8,385.78 c. $8,279.23 d. $7,723.25 3. What will a deposit of $4,500 at 12% compounded monthly be worth at the end of 10 years? a. $14,351.80 b. $14,851.80 c. $13,997.40 d. $14Read MoreTime Value of Money5284 Words   |  22 Pages12/9/2012 Chapter 9 The Time Value of Money 1 Chapter 9- Learning Objectives ïÆ' ¼ Identify various types of cash flow patterns (streams) that are observed in business. ïÆ' ¼ Compute (a) the future values and (b) the present values of different cash flow streams, and explain the results. ïÆ' ¼ Compute (a) the return (interest rate) on an investment (loan) and (b) how long it takes to reach a financial goal. ïÆ' ¼ Explain the difference between the Annual Percentage Rate (APR) and the Effective Annual RateRead MoreTime Value of Money2092 Words   |  9 PagesTime Value of Money The time value of money (TVM) or, discounted present value, is one of the basic concepts of finance and was developed by Leonardo Fibonacci in 1202. The time value of money (TVM) is based on the premise that one will prefer to receive a certain amount of money today than the same amount in the future, all else equal. As a result, when one deposits money in a bank account, one demands (and earns) interest. Money received today is more valuable than money received in the futureRead MoreTime Value of Money712 Words   |  3 Pageswill pay the bank over the life of the loan? $123,945.04 4. What is the effective rate of interest on a CD that has a nominal rate of 7.25 percent with interest compounded monthly? EAR = (1+.0725/12)^12 – 1 = 7.5% 5. What is the future value of $4,950 placed in a saving account for six years if the account pays 3%, compounded quarterly? PV = 4,950 N = 6 x 4 = 24 I =3/4 = .75% Pmt = - FV = $5,922.24 6. Your firm, Vandelay Industries, has just leased a $32,000 BMW for youRead MoreTime Value of Money and Present Value1154 Words   |  5 Pagescollege 15 years from today and the other will begin 17 years from today. You estimate your children’s college expenses to be $23,000 per year per child, payable at the beginning of each school year. The annual interest rate is 5.5 percent. How much money must you deposit in account each year to fund your children’s education? Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. Assume four years of college Solution: Cost of 1 year atRead MoreTime Value of Money Essay708 Words   |  3 PagesTime Value of Money Project Show all your work! Name _________________ 1. If Mrs. Beach wanted to invest a lump sum of money today to have $100,000 when she retired at 65 (she is 40 years old today) how much of a deposit would she have to make if the interest rate on the C.D. was 5%? a. What would Mrs. Beach have to deposit if she were to use high quality corporate bonds an earned an average rate of return of 7%. b. What would Mrs. Beach have to deposit if she