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# FM06 - Chapter 6 Time Value of Money LEARNING OBJECTIVES...

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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 fully-amortized and partially-amortized 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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FM06 - Chapter 6 Time Value of Money LEARNING OBJECTIVES...

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