07 Understand Time Value of Money

# 07 Understand Time Value of Money -...

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1 Chapter 3: Time Value of Money (part 2) A quick review: a single deposit FV = PV (1 + i) n What your money will grow to be PV = FV [1/(1 + i) n ] What your future money is worth today Inflation adjusted interest rate: (1+i)/(1+r) 1 Substituting i* for i when controlling for inflation _______________: multiple payments Definition ‐‐ a series of ____________ dollar payments coming at the end of a certain time period for a specified number of time periods (n). Examples–mortgages, life insurance benefits, lottery payments, retirement payments. ________________ Annuities Definition ‐‐ depositing an equal sum of money at the end of each time period for a certain number of periods and allowing the money to grow Example–having \$50 taken out of each paycheck and put in a Christmas account earning 9% Annual Percentage Rate. Future Value of an Annuity (FVA) Equation This equation is used to determine the future value of a stream of deposits/ payments (PMT) invested at a specific interest rate (i), for a specific number of periods (n) For example: the value of your 401(k) contributions. Future Value of an Annuity (FVA) Equation FVA = PMT{[(1 + i) n –1]/i} FVA = the future value, in today’s dollars, of a sum of money PMT = the payment made at the end of each time period i = interest rate n = number of periods

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2 Calculating the Future Value (FVA) of an Annuity: Assuming a \$2000 annual contribution with a 9% rate of return, how much will an IRA be worth in 30 years? FVA
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## This note was uploaded on 06/06/2011 for the course HACE 3200 taught by Professor B during the Spring '09 term at UGA.

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07 Understand Time Value of Money -...

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