TimeValueOfMoneyTutorial2010

# TimeValueOfMoneyTutorial2010 - FGB 381 Personal Financial...

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Time Value of Money Tutorial This tutorial is in the form of a PowerPoint slide show that you “drive” yourself. As you click the mouse, the slides build themselves to explain various time value of money concepts. You can use the [PageUp] key to back up and review material covered earlier. Happy clicking!! F G B 3 8 1 Personal Financial Planning © 1998-2011 James B. Pettijohn Missouri State University

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Why Does Money Have Time Value? Because it can be put to work to earn more money over time. Usually, these earnings are called …
Simple Interest Can be calculated using the simple interest formula: I = P*r*t Interest = Principal * rate * time Example: What are the interest on and the maturity value of a \$1000, two-year note at 5 percent simple interest? I = Prt I = 1000*.05*2 I = 100 Maturity Value = Principal + interest = 1000 + 100 = \$1100

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It helps to put problems on a Timeline I = P*r*t Interest = Principal * rate * time What are the interest on and the maturity value of a \$1000, two-year note at 5 percent simple interest? 0 2 \$1000|--------------------------|? \$1100 PV FV
Compound Interest Interest calculated more than once while money is on deposit (or borrowed). Each time interest is calculated, it is added to principal. Thus principal grows each time interest is calculated. Most common way interest is calculated.

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Compound Interest Example: What are the interest on and the maturity (or future) value of \$1000 deposited for 2 years at 5 percent compounded annually? 0 1 2 \$1000|---------------|----------------|? 1102.50 I=Prt =1050*.05*1 =52.50 I=Prt =1000*.05*1 =50 \$1050
Use the Future Value Table Future value tables contain interest factors that you can multiply times a PV to obtain a FV, given i & n. Appendix B Compound Sum of \$1 Percent Period 1% 2% 3% 4% 5% 1 1.0100 1.0200 1.0300 1.0400 1.0500 2 1.0201 1.0404 1.0069 1.0816 1.1025 3 1.0303 1.0612 1.0927 1.1249 1.1576

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Use the Future Value Table Appendix Compound Sum of \$1 Percent Period 1% 2% 3% 4% 5% 1 1.0100 1.0200 1.0300 1.0400 1.0500 2 1.0201 1.0404 1.0069 1.0816 1.1025 3 1.0303 1.0612 1.0927 1.1576 1.1025 Example: What are the interest on and the maturity (or future) value of \$1000 deposited for 2 years at 5 percent compounded annually? FV = PV*FV IF (n=2,i=5%) FV = 1000(1.1025) FV = 1102.50
Use a Financial Calculator n %i PV PMT FV Usually, you will be working with 4 out of 5 of these buttons.

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TimeValueOfMoneyTutorial2010 - FGB 381 Personal Financial...

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