Time Value of Money

# Time Value of Money - The piggy bank is indestructible for...

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Time Value of Money (TVM) TVM: A dollar (or other payment) can have different values depending on when the payment is received. Everyone has an innate understanding of TVM. Interest rates represent the amount of change in value over time. Ex. 1: 3 Piggy Banks What’s the most you would pay today for the pink piggy bank if it had \$100 in it and you could get into it today? What’s the most you would pay today for the purple piggy bank if it had \$100 in it and you could not get into it for one year? What’s the most you would pay today for the yellow piggy bank if it had \$100 in it and you could not get into it for five years? Ex. 2: 1 Piggy Bank What’s the most you would pay today for the pink piggy bank if it had \$100 in it and you could open it in exactly 1 year?

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Unformatted text preview: The piggy bank is indestructible for now but can be broken in 1 year at no cost. Your bank account pays you 10% per year. Ex. 3: The Check What’s the most you would pay today for a check written for \$110, but you could not cash it for 1 year? The market interest rate is 10%. The check was written by a major bank. Other banks are willing to purchase the check for its market value. Assumptions Our goal is to make money. There are many buyers and sellers. There are no transaction costs. The "market interest rate" represents the collective preferences of traders. The yield curve is flat. Unless told otherwise, the same interest rate applies regardless of the time of the investment....
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Time Value of Money - The piggy bank is indestructible for...

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