1. TIME VALUE OF
MONEY

2. Time line
 important tool used in time
value of money analysis; it is a
graphical representation used
to show the timing of cash
flows

3. Time :
0
1
2
3
4
5

4. Outflow
 cash deposit ,cost , or amount
paid
 has a minus sign
Inflow
 cash receipt

5. Time:
1
0
2
3
5%
Cash
flows:
100
?

6. Time:
0
1
5%
100
2
10%
?

7. Compounding
 arithmetic process of
determining the final value of a
cash flow or series of cash flow
when compound interest is
applied

8. 

9. 

10. 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

11. 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

12. N
I
PV
PMT
FV
= the number of periods
= interest rate of periods
= present value
= payment
= future value

13. 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

14. Opportunity Cost
Rate
 rate of return on the best
available alternative
investment of equal risks

15. Present Value (PV)
 value of today of a future cash
flow or series of cash flow

16. Fair(Equilibrium)
Value
 price at which investors are
indifferent between buying or
selling a security

17. Discounting
 process of finding the present
value of a cash flow or a series
of cash flows; discounting is
the reverse of compounding

18. 
0
5%
PV=?
1
2
3
4
5
127.63

19. 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

20. 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

21. 
0
?
78.35
1
2
3
4
5
100

22. 
0
5%
78.35
n=?
100

23. Annuity
 series of payment of an equal
amount at fixed intervals for a
specified number of periods

24. Ordinary
(Deferred) Annuity
 annuity whose payment occur
at the end of each period

25. Annuity Due
 annuity whose payment occur
at the beginning of each period

26.  future value of an annuity over
n periods

28. Perpetuity
 stream of equal payments
expected to continue forever

29. CONSOL
 perpetual bond issued by the
British government to
consolidated past debts; in
general, any perpetual bond

30. Uneven Cash Flow
Stream
 series of cash flow in which the
amount varies from one period
to the next

31. Payment (PMT)
 term designates equal cash
flows coming at regular
intervals

32. Cash Flows (CF)
 term designates uneven cash
flows

33. Terminal Value
 future value of an uneven cash
flows stream

34. 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

35. 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

36. Nominal
(Quoted, or
Stated, or APR)
InterestorRate or
 contracted, quoted,
stated, interest rate

37. Effective
(Equivalent)Annual
Rate (EFF% or EAR)
 annual rate of interest actually
being earned, as opposed to
the quoted rate
 “equivalent annual rate”

38. Annual Percentage
Rate (APR)
 periodic rate X the number of
periods per year

39. Amortized Loan
 loan that is repaid in equal
payments over its life

40. 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