2 - Time Value of Money Professor Peter Chung Time Value of...

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Time Value of Money Time Value of Money Professor Peter Chung
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Time Value of Money 1. Why does money have its time value?: Interest! 2. Why “interest” ? determinants of i 3. Basic concept Simple compounding (Table B) FV n = P 0 [FVF i , n ] Simple discounting (Table C) PV = FV n [PVF i , n ] Future Value Annuity (Table D) FVA n = A [FVAF i , n ] Present Value Annuity (Table E) PVA = A [PVAF i , n ] Perpetuity PP = A/ i 4. Application of time value of money Price of a bond Evaluation of a new project Auto or mortgage loan
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1.Why does money have time value? 0 1 $100.00 $107.00
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2. Why interest? Current consumption vs. future consumption Opportunity of productive investment Inflation safeguard Risk: “required rate of return
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3. Basic Concept 1. Compounding P 0 = $100.00 i = 6% I 1 =P 0 x i = $100 x 6% = $ 6.00 FV 1 = P0 + I 1 = $100.00 + $6.00 P 0 (1+i) * Non-annual compounding (e.g.) $100, 12%, quarterly compound for 5 years
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Basic Concept (cont’) 2. PV of a lump sum PV = the value in terms of today’s dollar e.g. you’ll graduate in 4 years, and get $10,000; i=10%
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Basic Concept (cont’) 3. FVA 4 0 1 2 3 4 5 3 $500 $500 $500 $500 $500 2 1
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2 - Time Value of Money Professor Peter Chung Time Value of...

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