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# Time value of money copy

## on Feb 09, 2014

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## Time value of money copyPresentation Transcript

• TIME VALUE OF MONEY
• Time line  important tool used in time value of money analysis; it is a graphical representation used to show the timing of cash flows
• Time : 0 1 2 3 4 5
• Outflow  cash deposit ,cost , or amount paid  has a minus sign Inflow  cash receipt
• Time: 1 0 2 3 5% Cash flows: 100 ?
• Time: 0 1 5% 100 2 10% ?
• Compounding  arithmetic process of determining the final value of a cash flow or series of cash flow when compound interest is applied
• Future value (FV)  amount to which a cash flow or a series of cash flows will grow over a given period of time when compounded at a given interest rate
• 0 Initial deposit: 1 2 3 4 5 5.79 6.08 100 Interest earned: 5.00 Amount at the end of each period = 105.00 5.25 5.51 110.25 115.76 121.55 127.63
• N I PV PMT FV = the number of periods = interest rate of periods = present value = payment = future value
• Relationship among Future Value, Growth, Interest Rates, and Time 5 4 Future Value of \$1 3 i = 0% I =5% 2 i = 10% i = 15% 1 0 0 2 4 6 8 10 Periods
• Opportunity Cost Rate  rate of return on the best available alternative investment of equal risks
• Present Value (PV)  value of today of a future cash flow or series of cash flow
• Fair(Equilibrium) Value  price at which investors are indifferent between buying or selling a security
• Discounting  process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding
•  0 5% PV=? 1 2 3 4 5 127.63
• 0 100 5% 1 105.00 1.05 2 110.25 1.05 3 4 5 115.76 1.05 121.25 1.05 127.63 1.05
• Relationship among Present Value, Interest Rates, and Time 1 0.75 i = 0% 0.5 i = 5% i = 10% i = 15% 0.25 0 0 2 4 6 8 10
•  0 ? 78.35 1 2 3 4 5 100
•  0 5% 78.35 n=? 100
• Annuity  series of payment of an equal amount at fixed intervals for a specified number of periods
• Ordinary (Deferred) Annuity  annuity whose payment occur at the end of each period
• Annuity Due  annuity whose payment occur at the beginning of each period
•  future value of an annuity over n periods
• Perpetuity  stream of equal payments expected to continue forever
• CONSOL  perpetual bond issued by the British government to consolidated past debts; in general, any perpetual bond
• Uneven Cash Flow Stream  series of cash flow in which the amount varies from one period to the next
• Payment (PMT)  term designates equal cash flows coming at regular intervals
• Cash Flows (CF)  term designates uneven cash flows
• Terminal Value  future value of an uneven cash flows stream
• Annual compounding  arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added once a year
• Semiannual Compounding  arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added twice a year
• Nominal (Quoted, or Stated, or APR) InterestorRate or  contracted, quoted, stated, interest rate
• Effective (Equivalent)Annual Rate (EFF% or EAR)  annual rate of interest actually being earned, as opposed to the quoted rate  “equivalent annual rate”
• Annual Percentage Rate (APR)  periodic rate X the number of periods per year
• Amortized Loan  loan that is repaid in equal payments over its life
• Amortization schedule  table showing precisely how a loan will be repaid  gives the required payment on each payment date and a breakdown of the payment, showing how much is interest and how much is repayment of principal