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Unformatted text preview: Chapter 2 Time Value of Money Learning Objectives 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 interest rate or time, given the other three variables in the TVM equation. Find the future value of a series of equal, periodic payments (an annuity) and the present value of such an annuity. Explain the difference between an ordinary annuity and an annuity due, and calculate the difference in their valuesboth on a present value and future value basis. Solve for annuity payments, periods, and interest rates, given the other four variables in the TVM equation. Calculate the value of a perpetuity. Demonstrate how to find the present and future values of an uneven series of cash flows and how to solve for the interest rate of an uneven series of cash flows. Solve TVM problems for nonannual compounding. Distinguish among the following interest rates: Nominal (or Quoted) rate, Periodic rate, Annual Percentage Rate (APR), and Effective (or Equivalent) Annual Rate; and properly choose among securities with different compounding periods. Solve time value of money problems that involve fractional time periods. Chapter 2: Time Value of Money Learning Objectives 7 Construct loan amortization schedules for fullyamortized loans. 8 Lecture Suggestions Chapter 2: Time Value of Money Lecture Suggestions We regard Chapter 2 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....
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This note was uploaded on 07/18/2011 for the course FI 515 taught by Professor Watson during the Spring '09 term at Keller Graduate School of Management.
 Spring '09
 WATSON
 Compounding

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