Ch4 - Dr Yi Ch 4 Introduction to Time Value of Money Outlines of Ch 4 and 5 Time Value of Money(TVM Time is money Piazzas $91 million contract Time

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Ch 4: Introduction to Time Value of Money Dr. Yi
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Outlines of Ch 4 and 5: Time Value of Money (TVM) Time is money ??? Piazza’s $91 million contract Time value of money = opportunity cost Solve TVM problems Basics Simple present / future value problem Simple vs. Compound Interest (Power of Compound) Compounding Frequency Annuity / Annuity Due / Perpetuity Uneven cash flow Amortization Table Effective annual rate
Background image of page 2
3 Mike Piazza’s $91 million Contract Mike Piazza's Contract (million) Today Contract Sum 1998 1999 2000 2001 2002 2003 2004 2005 Signing Bon 7.5 $ 4.0 $ 3.5 $ Salary 83.5 $ 6.0 $ 11.0 $ 12.5 $ 9.5 $ 14.5 $ 15.0 $ 15.0 $ Total 91.0 $ 10.0 $ 11.0 $ 12.5 $ 13.0 $ 14.5 $ 15.0 $ 15.0 $ 0 1 2 3 4 5 6 7 Discount Rate Value in 1998 Dollars 9.7 $ 10.4 $ 11.4 $ 11.6 $ 12.5 $ 12.6 $ 12.2 $ 3% 80.3 $
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Basics: Time lines show timing of cash flows. CF 0 CF 1 CF 3 CF 2 0 1 2 3 i% Tick marks at ends of periods, so Time 0 is today; Time 1 is the end of Period 1; or the beginning of Period 2. Today End of second year Start of third year
Background image of page 4
5 Basics: Four variables PV FV Interest rate, i Period, time length, or investment horizon, n FV 0 1 2 Year, n i% PV ( 29 1 n n FV PV i = +
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 FV and PV Future Value Future Value is the value at some future time of a present amount of money, or a series of payments, evaluated at a given interest rate. Present Value Present Value is the current value of a future amount of money, or a series of payments, evaluated at a given interest rate.
Background image of page 6
7 Basics: What’s the FV of an initial $100 after 3 years if i = 10%? FV = ? 0 1 2 3 10% Finding FVs (moving to the right on a time line) is called compounding . 100
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 10% Basics: What’s the PV of $100 due in 3 years if i = 10%? Finding PVs is discounting , and it’s the reverse of compounding. 100 0 1 2 3 PV = ?
Background image of page 8
9 Compounding vs. Discounting
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
10 Find the time-weighted value of three $100s at year 2. 100 100 100 0 1 2 3 10% Compound the first 100 = 100 *1.1 = 110 Discount the last 100 = 100 / 1.1 = 90.9 PV at year 2 = 110 + 100 + 90.9 = 300.9 Alternatively, 248.69 * 1.1 2 = 300.9 Second alternatively, 331 / 1.1 = 300.9
Background image of page 10
11 Financial calculators solve this equation: There are 4 variables. If 3 are known, the calculator will solve for the 4th.
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/28/2012 for the course FIN 3313 taught by Professor Yi during the Spring '12 term at Texas State.

Page1 / 36

Ch4 - Dr Yi Ch 4 Introduction to Time Value of Money Outlines of Ch 4 and 5 Time Value of Money(TVM Time is money Piazzas $91 million contract Time

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online