Time Value of Money

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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 “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. Because the bank is using the deposited funds, the

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