Chapter 2 FIN3414

# Chapter 2 FIN3414 - 1 2 3 CHAPTER 2 4 5 I:THE TIME VALUE OF...

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1 CHAPTER 2 2 3 4 5 Introduction 6 Beginning this chapter, we are going to learn one of the most important topics in 7 finance, the time value of money. Note that almost every course, which you will 8 take as finance major, depends largely on time value of money. Hence, it is a good 9 idea to spend a fair amount of time in learning the concepts. 10 11 Essentially, we will learn the following concepts: 12 1. The conventions used in the study of time value of money 13 2. The time value of money under simple rate of interest 14 The simple rate of interest nowadays is mostly of academic interest. You 15 will seldom find any transaction either in the real world or in the academics 16 that is based on the simple rate of interest. In fact, this is a fortunate 17 development in the sense that the only thing that is simple about the simple 18 rate of interest is its name. Otherwise the mathematical foundations and the 19 resultant applications are almost impossible to deal with mathematically. 20 Just to understand its complexity we will devote some time on this topic. 21 22 In the simple rate of interest we will learn 23 a. Future value of an amount 24 b. Present value of an amount 25 c. Future value of an annuity 26 d. Present value of an annuity 27 28 3. Compound rate of interest 29 All the topics in the time value of money that we will learn are under 30 compound rate of interest. The topic that will be covered can be broadly 31 categorized as in two main categories 32 a. The time value concepts under the lump sum case 33 b. The time value concepts under a series of payments case 34 35 In lump sum case we will learn 36 a. Present value of an amount 37 b. Future value of an amount 38 c. Finding the unknown rate of interest 39 d. Finding the unknown time period 40 41 Under the series of payments topic we will learn present and future value of 42 a series of payments including future and present value of annuities and 43

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annuity dues. We will also learn how to find the unknown rate of interest as 44 well as the unknown time period. All of the above concepts will be dealt 45 with under annual compounding, compounding „ m ‟ ( m >1) times per year 46 and continuous compounding. 47 48 4. Special topics 49 Under this we will discuss the concept of time value of money for such 50 topics but not limited to cash flows growing at a constant rate (under the 51 constant growth rate) and/or under constant level increments, when 52 compounding and deposit intervals are different etc. 53
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Chapter 2 FIN3414 - 1 2 3 CHAPTER 2 4 5 I:THE TIME VALUE OF...

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