Scribd Logo
Upload

Welcome to Scribd!

  • 216 views

    Time Value of Money

    Uploaded by

    Xytus
    The document provides information about time value of money concepts including simple interest, present value, compound interest, future value, present value of ordinary annuity, future value of ordinary annuity, and present value of annuity due. It defines each concept and provides examples of how to calculate them using common formulas. For each concept, it gives a definition, explains when the concept is used, provides the relevant formula, and works through a sample calculation problem as an illustration.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Time Value of Money

    Uploaded by

    Xytus
    216 views5 pages
    The document provides information about time value of money concepts including simple interest, present value, compound interest, future value, present value of ordinary annuity, future value of ordinary annuity, and present value of annuity due. It defines each concept and provides examples of how to calculate them using common formulas. For each concept, it gives a definition, explains when the concept is used, provides the relevant formula, and works through a sample calculation problem as an illustration.

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document provides information about time value of money concepts including simple interest, present value, compound interest, future value, present value of ordinary annuity, future value of ordinary annuity, and present value of annuity due. It defines each concept and provides examples of how to calculate them using common formulas. For each concept, it gives a definition, explains when the concept is used, provides the relevant formula, and works through a sample calculation problem as an illustration.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    216 views5 pages

    Time Value of Money

    Uploaded by

    Xytus
    The document provides information about time value of money concepts including simple interest, present value, compound interest, future value, present value of ordinary annuity, future value of ordinary annuity, and present value of annuity due. It defines each concept and provides examples of how to calculate them using common formulas. For each concept, it gives a definition, explains when the concept is used, provides the relevant formula, and works through a sample calculation problem as an illustration.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    CAED102: FINANCIAL MARKETS

    ACTIVITY #5: TIME VALUE OF MONEY (30 pts)

    Name: ____Xytus Anne Cortero__________ Section: __AC24______


    INSTRUCTIONS:
    Answer the following questions and cite your corresponding source/s.
    1. What is time value of money all about? (2 pts)
    Answer: The time value of money (TVM) is the concept that money you have now is
    worth more than the identical sum in the future due to its potential earning capacity. This core
    principle of finance holds that provided money can earn interest, any amount of money is worth
    more the sooner it is received.

    Source/s: https://www.investopedia.com/terms/t/timevalueofmoney.asp

    2. (4 pts) What is simple interest?


    a. Define simple interest. (1 pt)
    b. When do you use it? (1 pt)
    c. What is its formula? (1 pt)
    d. Give one sample problem. (1 pt)
    Answer:
    a. Simple interest is a quick and easy method of calculating the interest charge on
    a loan.

    b. This type of interest usually applies to automobile loans or short-term loans,


    although some mortgages use this calculation method.

    c. Simple interest is determined by multiplying the daily interest rate by the


    principal by the number of days that elapse between payments.
    Simple Interest=P×I×N
    where:
    P=principle
    I=daily interest rate
    N=number of days between payments

    d. Mr. Albertson plans to place his money in a certificate of deposit that matures
    in three months. The principal is $10,000 and 5% interest is earned annually. He
    wants to calculate how much interest he will earn in those three months.
    I=PxRxT
    I = $10,000 x 5%/year x 3/12 of a year
    I = $125

    Source/s: https://www.investopedia.com/terms/s/simple_interest.asp
    https://corporatefinanceinstitute.com/resources/knowledge/finance/simple-
    interest-definition/

    3. (4 pts) What is Present Value?


    a. Define Present Value. (1 pt)
    b. When do you use it? (1 pt)
    c. What is its formula? (1 pt)
    d. Give one sample problem. (1 pt)
    Answer:
    a. Present value (PV) is the current value of a future sum of money or stream of
    cash flows given a specified rate of return. Future cash flows are discounted at the
    discount rate, and the higher the discount rate, the lower the present value of the
    future cash flows.

    b. Present value provides an estimate of what we should spend today to have an


    investment worth a certain amount of money at a specific point in the future.

    c. Present Value= FV/(1+r)n


    where:
    FV=Future Value
    r=Rate of return
    n=Number of periods

    d. Suppose you are depositing an amount today in an account that earns 5%


    interest, compounded annually. If your goal is to have $5,000 in the account at the
    end of six years, how much must you deposit in the account today?
    Solution:
    The following information is given:
    future value = $5,000
    interest rate = 5%
    number of periods = 6

    Inserting the known information,


    PV = $5,000 / (1 + 0.05)6
    PV = $5,000 / (1.3401)
    PV = $3,731

    Source/s: https://www.investopedia.com/terms/p/presentvalue.asp
    http://educ.jmu.edu/~drakepp/principles/module3/pvex.html

    5. What is compound interest? (1 pt)


    Answer: Compound interest (or compounding interest) is the interest on a loan or
    deposit calculated based on both the initial principal and the accumulated interest from previous
    periods.

    Source/s: https://www.investopedia.com/terms/c/compoundinterest.asp

    6. (4 pts) What is Future Value?


    a. Define Future Value. (1 pt)
    b. When do you use it? (1 pt)
    c. What is its formula? (1 pt)
    d. Give one sample problem. (1 pt)
    Answer:
    a. Future value (FV) refers to a method of calculating how much the present value
    (PV) of an asset or cash will be worth at a specific time in the future. Knowing the
    future value enables investors to make sound investment decisions based on their
    anticipated needs.

    b. The future value (FV) is important to investors and financial planners as they
    use it to estimate how much an investment made today will be worth in the future.

    c. Future Value(FV) = Present Value (1 + (Interest Rate x Number of Years))

    d. Let’s say Bob invests $1,000 for five years with an interest rate of 10%. This
    time, it’s compounded annually. The future value of Bob’s investment would be
    $1,610.51.

    Source/s: https://investinganswers.com/dictionary/f/future-value-fv

    7. (4 pts) What is Present Value of Ordinary Annuity?


    a. Define Present Value of Ordinary Annuity. (1 pt)
    b. When do you use it? (1 pt)
    c. What is its formula? (1 pt)
    d. Give one sample problem. (1 pt)
    Answer:
    a. The present value of an annuity is the current value of future payments from an
    annuity, given a specified rate of return, or discount rate. The higher the discount
    rate, the lower the present value of the annuity.

    b. You can use a present value calculation to determine whether you'll receive
    more money by taking a lump sum now or an annuity spread out over a number of
    years.
    c. PV of Ordinary Annuity = PMT× (1-(1/(1+r )ˆn)/r)
    where:
    PMT=Dollar amount of each annuity payment
    r=Interest rate (also known as discount rate)
    n=Number of periods in which payments will be made
    d. Let’s say your structured settlement pays you $1,000 a year for 10 years. If you
    keep all your payments, you will eventually receive $10,000. But what if you lose
    your job and need more than $1,000 a year to cover your expenses? Let’s assume
    you want to sell five years’ worth of payments, or $5,000, and the factoring
    company applies a 10 percent discount rate.
    In this example,

    PMT= $1,000
    r= 10 percent, represented as 0.10
    n= 5 (one payment each year for five years)

    Source/s: https://www.investopedia.com/terms/p/present-value-annuity.asp
    https://www.annuity.org/selling-payments/present-value/
    8. (4 pts) What is Future Value of Ordinary Annuity?
    a. Define Future Value of Ordinary Annuity. (1 pt)
    b. When do you use it? (1 pt)
    c. What is its formula? (1 pt)
    d. Give one sample problem. (1 pt)
    Answer:
    a. The future value of an annuity is the value of a group of recurring payments at
    a certain date in the future, assuming a particular rate of return, or discount
    rate. The higher the discount rate, the greater the annuity's future value.

    b. In an ordinary annuity, the first cash flow occurs at the end of the first period.
    c. FV of Ordinary Annuity = PMT× [(1+r)n-1)/r]
    where:
    PMT=Dollar amount of each annuity payment
    r=Interest rate (also known as discount rate)
    n=Number of periods in which payments will be made

    d. For example, assume someone decides to invest $125,000 per year for the next
    five years in an annuity they expect to compound at 8% per year. The expected
    future value of this payment stream using the above formula is as follows:
    FV of Ordinary Annuity = $125,000× [(1+.08)5-1/.08]= $733,325

    Source/s: https://www.investopedia.com/terms/f/future-value-annuity.asp

    9. (4 pts) What is Present Value of Annuity Due?


    a. Define Present Value of Annuity Due. (1 pt)
    b. When do you use it? (1 pt)
    c. What is its formula? (1 pt)
    d. Give one sample problem. (1 pt)
    Answer:
    a. The present value of an annuity due uses the basic present value concept for
    annuities, except we should discount cash flow to time zero.

    b. The discounted value of a series of equal amounts occurring at the beginning of


    each equal time interval. The first payment is received at the start of the first
    period and, thereafter, at the start of each subsequent period.

    c. For this formula, the following values are used:


    P = periodic payment
    r = rate per period
    n = number of periods
    The formula used is:
    PV of Annuity Due = P + P (1-(1+r)ˆ-(n-1)/r)

    d. For example, an annuity due's interest rate is 5%, you are promised the money
    at the end of 3 years and the payment is $100 per year.

    Using the present value of an annuity due formula:

    PV of Annuity Due = 100 + 100[1-(1+.05)ˆ-(3-1)/.05]


    PV of Annuity Due = 200(1-(1.05)ˆ-2/.05) = $285.94
    The value of $285.94 is the current value of three payments of $100 with 5%
    interest.

    Source/s: https://www.thebalancesmb.com/how-do-you-calculate-the-
    present-value-of-an-annuity-due-393389
    https://corporatefinanceinstitute.com/resources/knowledge/finance/annuity-due/

    10. (4 pts) What is Future Value of Annuity Due?


    a. Define Future Value of Annuity Due. (1 pt)
    b. When do you use it? (1 pt)
    c. What is its formula? (1 pt)
    d. Give one sample problem. (1 pt)
    Answer:
    a. The future value of an annuity due uses the same basic future value concept for
    annuities with a slight tweak, as in the present value formula. The amount that a
    recurring equal amount deposited at the beginning of each period will grow to
    under compounded interest. An annuity due is also known as an annuity in
    advance.

    b. An annuity due is a series of payments made at the beginning of each period in


    the series. Therefore, the formula for the future value of an annuity due refers to
    the value on a specific future date of a series of periodic payments, where each
    payment is made at the beginning of a period.

    c. FV of Annuity Due = PMT [((1+r)n-1/r)(1 + r)]

    Where:
    PMT = The amount of each annuity payment
    r = The interest rate
    n = The number of periods over which payments are to be made

    d. For example, the treasurer of ABC Imports expects to invest $50,000 of the
    firm's funds in a long-term investment vehicle at the beginning of each year for
    the next five years. He expects that the company will earn 6% interest that will
    compound annually. The value that these payments should have at the end of the
    five-year period is calculated as:

    FV of Annuity Due = $50,000 [(1+.06)5-1/.06)(1 + .06)]


    FV of Annuity Due = $298,765.90

    Source/s:
    https://www.accountingtools.com/articles/what-is-the-formula-for-the-future-
    value-of-an-annuity-due.html
    https://corporatefinanceinstitute.com/resources/knowledge/finance/annuity-due/
    https://www.accountingtools.com/articles/what-is-the-formula-for-the-future-
    value-of-an-annuity-due.html

    You might also like