Time Value Of Money

Time value of money January 6 2007

Overview ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

There are 3 ways of looking at Interest rates ,[object Object],[object Object],[object Object],[object Object],[object Object]

Background: First, Let us take a quick look at the basic economic concept of Opportunity cost ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Time value of money ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],A dollar today is worth more than a dollar tomorrow

In calculating PV, choice of discount rate is fairly critical Time Period PV of $100 FV

Inflation and risk impact interest rates ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Frequency of compounding ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Annuity calculations ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Series of CF’s ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Annuity calculations ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Concept of Net Present Value (NPV) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],---> NPV encapsulates the value created or lost by a decision ---> To be successful, firms must find +ve NPV opportunities and avoid -ve NPV choices

Internal rate of return (IRR) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Other applications of TVM ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Calculator tips ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Calculator tips - NPV ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Calculator tips - IRR ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

What’s the value of a 10-year, 10% coupon bond if k d = 10%? V B = ? Bond Valuation Example $100 $100 $100 + $1,000 0 1 2 10 10% ... = $90.91 + . . . + $38.55 + $385.54 = $1,000. V k k B d d  $100 $1 , (1 000 (1 1 10 10 . . . + $100 (1 + k d + + + + ) ) )

Time Value Of Money

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