TIME VALUE OF MONEY 1. If you were scheduled to receive Rs 100,000 five years hence, but you wish to sell your contract note for its present value, which type of compounding would you rather have the purchaser of your contract note to use to find the purchase price, 8 percent compounded: (a) (b) (c) (d) (e) Continuously Quarterly Semi-annually Annually None of the above 2. According to the rule of 69, the doubling period is equal to (a) (b) (c) (d) (e) 0.25 + (69/ Interest rate) 0.35 + (69/ Interest
Time Value of Money Extra Problem Set 1 1. You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to draw out of your savings at the rate of $10,000 per year. How much would you have to pay in equal annual deposits until retirement to meet your objectives? Assume interest remains at 9%. [$1254] 2. You can deposit $4000 per year into an account that pays 12% interest. If you deposit such amounts for 15 years and start drawing money out of
Time Value of Money (TVM), developed by Leonardo Fibonacci in 1202, is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM is based on the concept that a dollar today is worth more than a dollar in the future. That is mainly because money held today can be invested and earn interest. A key concept of TVM is that a single sum of money or a series of equal,
Finance Time Value of Money We earn money to spend it and we save money to spend it in the future. However, for most people spending money in the present time is more desirable since the future is unknown. We can gratify the desire to spend money today rather than in the future by knowing the basic law in finance time value of money. This means that a dollar today is worth more than a dollar at some time in the future. Unfortunately, people very often want to buy things at the present time which
Time Value of Money The time value of money relates to many activities and decision in the financial world. “Understanding the effective rate on a business loan, the mortgage payment in a real estate transaction, or the true return on an investment depends on understanding the time value of money” (Block, Hirt, 2005). The concept of time value of money helps determine how financial assets are valued and how investors establish the rates of return they demand. Many different types of companies
Time Value of Money The time value of money (TVM) or, discounted present value, is one of the basic concepts of finance and was developed by Leonardo Fibonacci in 1202. The time value of money (TVM) is based on the premise that one will prefer to receive a certain amount of money today than the same amount in the future, all else equal. As a result, when one deposits money in a bank account, one demands (and earns) interest. Money received today is more valuable than money received in the future
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
Abstract The first steps toward understanding the relationship between the value of dollars today and that of dollars in the future is by looking at how funds invested will grow over time. This understanding will allow one to answer such questions as; how much should be invested today to produce a specified future sum of money? Time Value of Money In most cases, borrowing money is not free, unless it is a fiver for lunch from a friend. Interest is the cost of borrowing money. An interest rate
Time Value of Money Problems 1. What will a deposit of $4,500 at 10% compounded semiannually be worth if left in the bank for six years? a. $8,020.22 b. $7,959.55 c. $8,081.55 d. $8,181.55 2. What will a deposit of $4,500 at 7% annual interest be worth if left in the bank for nine years? a. $8,273.25 b. $8,385.78 c. $8,279.23 d. $7,723.25 3. What will a deposit of $4,500 at 12% compounded monthly be worth at the end of 10 years? a. $14,351.80 b. $14,851.80 c. $13,997.40 d. $14
12/9/2012 Chapter 9 The Time Value of Money 1 Chapter 9- Learning Objectives Identify various types of cash flow patterns (streams) that are observed in business. Compute (a) the future values and (b) the present values of different cash flow streams, and explain the results. Compute (a) the return (interest rate) on an investment (loan) and (b) how long it takes to reach a financial goal. Explain the difference between the Annual Percentage Rate (APR) and the Effective Annual Rate