11+Finance+II++TVM

11+Finance+II++TVM - TimeValueofMoney ProfessorRoberts...

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Time Value of Money Professor Roberts
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Agenda Interest Calculations Simple Interest Compound Interest Time Value of Money Future Value Present Value Interest rate versus Discount rate Rational Investor Risk/Reward  Calculator Workshop
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Simple Interest Interest is earned only on the original investment/principal  amount. Linear Growth  in Inve s tm e nt Exa m ple : $100, 3-ye a r inve s tm e nt a t 15%  s im ple  inte re s t Year 1 - $100 *  .15 = $15 interest  Total = $115 Year 2 - $100 * .15 = $15 interest  Total = $130 Year 3 - $100 * .15 = $15 interest  Total = $145 Total Interest =  $45  
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C o m po und Inte re s t Inte re s t Ra te  is  e a rne d o n the  o rig ina l  princ ipa l  plus  a ny a c c um ula te d inte re s t “Inte re s t o n Inte re s t” Exponential Growth Mo s t c o m m o nly us e d
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C o m po und Inte re s t Exa m ple : $100, 3-ye a r inve s tm e nt a t 15%   inte re s t, c o m po unde d a nnua lly Ye a r 1: $100.00 *.15 = $15.00 inte re s t  To ta l = $115.00 Ye a r 2: $115.00 *.15 = $17.25 inte re s t   To ta l = $132.25 Ye a r 3: $132.25 *.15 = $19.84 inte re s t  To ta l = $152.09 To ta l Inte re s t =  $52.09
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Compound vs. Simple Interest Compound Simple Check this out!
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Time Value of Money (TVM)
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$$ Today or $$ “Tomorrow”? Four questions: How much $$ today? How much $$ “tomorrow”? How long until “tomorrow”? What equivalent use could I have put the $$ to if I  had it today?
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What will be the value at a point in the future of an investment made  today, if I invest a specific amount, at a specific interest rate, for a  specific period of time? Function of:
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11+Finance+II++TVM - TimeValueofMoney ProfessorRoberts...

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