TVM, Future Value Interest Factor (FVIF), Present Value Interest Factor (PVIF), present value interest factor of an annuity (PVIFA)
Using estimated rates of return, you can compare the value of the annuity payments to the lump sum.
The present value interest factor may only be calculated if the annuity payments are for a predetermined amount spanning a predetermined range of time.
Time Value of Money Formula
FV = PV x [ 1 + (i / n) ] (n x t)
Formula for Future Value Interest factor:
FVIF = (1+r)n
Formula for PVIF
PVIF = 1 / (1 + r)n
What is the 'Time Value of Money - TVM'
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.
BREAKING DOWN 'Time Value of Money - TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.
BREAKING DOWN 'Compound Interest'
Compound Interest Formula
Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.The total initial amount of the loan is then subtracted from the resulting value.
What is the 'Time Value of Money - TVM'
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.
BREAKING DOWN 'Time Value of Money - TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.
BREAKING DOWN 'Compound Interest'
Compound Interest Formula
Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.The total initial amount of the loan is then subtracted from the resulting value.
Time value of Money- Future Value- Present Value- Annuity Method- Multiple period compounding- Doubling Period- Valuation- Valuation of Equity share- Valuation of Preference share- Valuation of Debenture
time value of money
,
concept of time value of money
,
significance of time value of money
,
present value vs future value
,
solve for the present value
,
simple vs compound interest rate
,
nominal vs effective annual interest rates
,
future value of a lump sum
,
solve for the future value
,
present value of a lump sum
,
types of annuity
,
future value of an annuity
Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best for you? Why should you care? Let's find out.
Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.
Introduction to Financial Analytics -Fundamentals of Finance Class I
by Reuben Ray; reuben@pexitics.com
• Time value of money.
• Present value & future value of money.
• Applications of TVM (Time Value of Money)
• Annuity & perpetuity concepts.
• Introduction to financial statements.
Time value of Money- Future Value- Present Value- Annuity Method- Multiple period compounding- Doubling Period- Valuation- Valuation of Equity share- Valuation of Preference share- Valuation of Debenture
time value of money
,
concept of time value of money
,
significance of time value of money
,
present value vs future value
,
solve for the present value
,
simple vs compound interest rate
,
nominal vs effective annual interest rates
,
future value of a lump sum
,
solve for the future value
,
present value of a lump sum
,
types of annuity
,
future value of an annuity
Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best for you? Why should you care? Let's find out.
Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.
Introduction to Financial Analytics -Fundamentals of Finance Class I
by Reuben Ray; reuben@pexitics.com
• Time value of money.
• Present value & future value of money.
• Applications of TVM (Time Value of Money)
• Annuity & perpetuity concepts.
• Introduction to financial statements.
Time Value of Money (TVM), also known as present discounted value, refers to the notion that money available now is worth more than the same amount in the future, because of its ability to grow.
The term is similar to the concept of ‘time is money’, in the sense of the money itself, rather than one’s own time that is invested. As long as money can earn interest (which it can), it is worth more the sooner you get it.
this is a lecture on time value of money which explains the topic time value of money in a very easy and simple way... it also explains some examples on the topic... plus definition of rate of return, real rate of return, inflation premium, nominal interest rate,market risk, maturity risk,liquidity risk,and default risk,
Parties to negotiable instruments include the maker or drawer, drawee, payee, holder, holder in due course, endorser, endorsee, drawee in the case of need and acceptor for honour. The maker or drawer initiates the instrument and the drawee is directed to make the payment. The payee is the intended recipient of the payment. Holders can be payees or those who possess the instrument through endorsement.
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Basic introduction about business, trade and international trade.
• International Trade, basic concepts of international economics, international business, profit entities, non-profit organizations., limited liability companies, small operations, Trade, buying and selling of goods, buying and selling of goods services, exchange of goods or services, exchange between two countries, import, export, EXIM, Foreign exchange, overseas trade, sold overseas, Visible trade, Invisible trade, boost nations’ wealth, cheaper product or service, living standards, foreign suppliers, better quality, availability, foreign currency, Adam Smith (1723-1790), Scottish moral philosopher, political economy, no sufficient resources, surplus, heart of today’s global economy, Price, quality, quantity, customer satisfaction, Availability, demand, Comparative Advantage, Economies of Scale, Jobs, transfer of technology, Over-Specialization, New Companies, National Security
Portfolio revision, securities, New securities, existing securities, purchases and sales of securities, maximizing the return, minimizing the risk, Transaction cost, Taxes, Statutory stipulations, Intrinsic difficulty, commission and brokerage, push up transaction costs, reducing the gains, constraint, Taxes, capital gains, long-term capital, lower rate, Frequent sales, short-term capital gains, investment companies, constraints, established, objectives, skill, resources and time, substantial adjustments, mispriced, excess returns, heterogeneous expectations, better estimates, generate excess returns, market efficiency, little incentive, predetermined rules, changes in the securities market, Performance measurement, Performance evaluation, superior or inferior, small investors, better performance, prompt liquidity, comparative performance, purchase and sale of securities.
Portfolio Management, Active, Passive, Discretionary Portfolio management services and Non-Discretionary Portfolio management services
OBJECTIVES OF PORTFOLIO MANAGEMENT:
Stable Current Return
Marketability
Tax Planning
Appreciation in the value of capital
Liquidity
Safety of the investment
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The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
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2. Time Value of Money (TVM)
• The time value of money draws from the idea that
rational investors prefer to receive money today
rather than the same amount of money in the
future because of money's potential to grow in
value over a given period of time.
– For example, money deposited into a savings account earns
a certain interest rate and is therefore said to be
compounding in value.
3. Time Value of Money Formula
• FV = PV x [ 1 + (i / n) ] (n x t)
FV = Future value of money
PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years
4. Example Problems
1. Assume a sum of Rs.10,000 is invested for one
year at 10% interest. Calculate the future value of that
money.
FV = ?
PV = 10,000
i = 10%
n = 1
t = 1
FV = PV x [ 1 + (i / n) ] (n x t)
FV = 10,000 x [1 + (10% / 1)] ^ (1 x 1)
= Rs. 11,000
5. 2. Taking the same problem, Rs.10,000 is invested at 10% interest,
if the number of compounding periods is increased to quarterly,
monthly, or daily, the ending future value calculations are:
• Quarterly Compounding:
FV = PV x [ 1 + (i / n) ] (n x t)
FV = 10,000 x [1 + (10% / 4)] ^ (4 x 1)
= Rs.11,038
• Monthly Compounding:
FV = 10,000 x [1 + (10% / 12)] ^ (12 x 1)
= 11,047
• Daily Compounding:
FV = 10,000 x [1 + (10% / 365)] ^ (365 x 1)
= 11,052
This shows TVM depends not only on interest rate and time
horizon, but also on how many times the compounding
calculations are computed each year.
6. Future Value Interest Factor (FVIF)
• Future value interest factor (FVIF), also known as a
future value factor, is a component that helps to
calculate the future value of a cash flow that will be
paid at a certain point in the future.
• The future cash flow could be a single cash flow or a
series of cash flows (that occur at regular time
intervals)
7. Formula
Formula for Future Value Interest factor:
FVIF = (1+r)n
• r = interest rate per period
• n = number of time periods
Formula for Future Value factor:
FV=C0×(1+r)n
• C0 = Cash flow at the initial point (present value)
• r = rate of return
• n = number of periods
8. Example Problems
1. Paul deposits Rs.1,000 in a bank for 2 years at 6% per year compounded
annually. What will be the value of the money at the end of 2 years?
FVIF = (1+r)n
• r = 6% = 0.06
• n = 2
FVIF = (1 + 0.06)²
FVIF = 1.1236
FV=C0×(1+r)n
• C0 = Rs. 1000
• r = 6% = 0.06
• n = 2
FV = 1000 * 1.1236
FV = Rs. 1,123.60
9. 2. Paul deposits Rs. 1,000 in a bank for 2 years at 6% per year,
but this time it is compounded semi-annually. What will be the
value of the money at the end of 2 years?
Hint: The number of periods, in this case, would be 4 (2 years * 2 periods
per year) and the rate will be 3% (6% divided by 2 periods).
FVIF = (1+r)n
r = .% = 0.03; n = 4
FVIF = (1 + 0.03)4
FVIF = 1.1255
FV=C0×(1+r)n
C0 = Rs. 1000; r = 3% = 0.03; n = 4
FV = 1000 * 1.1255
FV = Rs. 1,125.50
10. Present Value Interest Factor (PVIF)
• The present value interest factor (PVIF) is a formula
used to estimate the current worth of a sum of
money that is to be received at some future date.
PVIFs are often presented in the form of a table with
values for different time periods and interest rate
combinations.
11. Formula
PVIF = 1 / (1 + r)n
where:
a = The future sum to be received
r = The discount interest rate
n = The number of years or other time period
12. Understanding the PVIF
• The present value interest factor is based on the key
financial concept of the time value of money. That is, a
sum of money today is worth more than the same
sum will be in the future, because money has the
potential to grow in value over a given period of time.
Provided money can earn interest, any amount of
money is worth more the sooner it is received.
• Present value impact factors are often used in
analyzing annuities. The present value interest factor
of an annuity (PVIFA) is useful when deciding
whether to take a lump-sum payment now or accept an
annuity payment in future periods.
13. • Using estimated rates of return, you can compare the value of
the annuity payments to the lump sum.
• The present value interest factor may only be calculated if the
annuity payments are for a predetermined amount spanning a
predetermined range of time.
14. Example
Assume an individual is going to receive Rs. 10,000 five years
from now, and that the current discount interest rate is 5%.
PVIF = a / (1 + r)n
where:
a = 10,000
r = 5% or 0.05
n = 5 years
PVIF = 10,000 / (1 + .05) ^ 5
= 7835.26
15. The present value of the future sum is then
determined by subtracting the PVIF figure from the
total future sum to be received. Thus, the present
value of the
Rs.10,000 to be received five years in the future
would be
PV = Rs.10,000 – Rs. 7,835.26
PV = Rs. 2,164.74.