After reading this chapter, students should be able to:
•
Convert time value of money (TVM) problems from words to time lines.
•
Explain the relationship between compounding and discounting, between
future and present value.
•
Calculate the future value of some beginning amount, and find the present
value of a single payment to be received in the future.
•
Solve for time or interest rate, given the other three variables in the
TVM equation.
•
Find the future value of a series of equal, periodic payments (an annuity)
as well as the present value of such an annuity.
•
Explain the difference between an ordinary annuity and an annuity due, and
calculate the difference in their values.
•
Calculate the value of a perpetuity.
•
Demonstrate how to find the present and future values of an uneven series
of cash flows.
•
Distinguish among the following interest rates:
Nominal (or Quoted) rate,
Periodic rate, and Effective (or Equivalent) Annual Rate; and properly
choose between securities with different compounding periods.
•
Solve time value of money problems that involve fractional time periods.
•
Construct loan amortization schedules for both fullyamortized and
partiallyamortized loans.
Learning Objectives:
6  1
Chapter 6
Time Value of Money
LEARNING OBJECTIVES
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We regard Chapter 6 as the most important chapter in the book, so we spend a
good bit of time on it.
We approach time value in three ways.
First, we try to
get students to understand the basic concepts by use of time lines and simple
logic. Second, we explain how the basic formulas follow the logic set forth in
the time lines.
Third, we show how financial calculators and spreadsheets can
be used to solve various time value problems in an efficient manner.
Once we
have been through the basics, we have students work problems and become
proficient with the calculations and also get an idea about the sensitivity of
output, such as present or future value, to changes in input variables, such as
the interest rate or number of payments.
Some instructors prefer to take a strictly analytical approach and have
students focus on the formulas themselves.
Others prefer to use the Present
Value Tables, which have for many years been supplied with the text.
In both
cases, the argument is made that students treat their calculators as “black
boxes,” and that they do not understand where their answers are coming from or
what they mean.
We disagree.
We think that our approach shows students the
logic behind the calculations as well as alternative approaches, and because
calculators are so efficient, students can actually see the significance of what
they are doing better if they use a calculator.
We also think it is important
to teach students how to use the type of technology (calculators and
spreadsheets) they must use when they venture into the real world.
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 Spring '11
 ElijahChen
 Time Value Of Money, Future Value, Net Present Value

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