Time Value and Money

TIME VALUE AND MONEY
Why interest is paid

• Time value and money means that the value of a unity of money is different in different time periods.
• The sum of money received in future is less valuable than it is today.
• Inflation is also a reason for that because today money purchasing
• power is less in the future.
• And the lending incurs an opportunity cost due to the alternative
• uses of the lent money.
Important words
Interest:- it is a price paid by a borrower for the use of a lender’s money.
Principal:- it is a initial value of lending or borrowing.
Rate of interest:- The rate at which interest is charged for a defined length of time for use of principal.
Accumulated balance:- it is amount which is a final value of an investment. Total of principal and interest earned.
Simple Interest:-
o It is interest computed on the principal for the entire period of borrowing.
o It is calculated on the principal amount only and not on interest previously earned.
o Formula :-
P- principal value , r- rate of interest, t- time period in years
o Formula for Amount :-
Example :- How much interest will be earned on 2000 at 6% simple interest for 2 year and its amount after 2 year?
Solution:- = simple interest = , P = 2000, r= 6%, t= 2
= 2000*6%*2 = 240
= Amount = = 2000+ 240 = 2240
Compound interest:-
In a real practice banks, insurance corporation and other money lenders and deposit taking companies doesn’t calculate
interest with the help of simple interest they use different method which is known as compound interest.
It is known as the interest that accurse when earning for each specified period of time added to the principal thus increasing
the principal base on which subsequent interest is computed.
Ex :- Saina deposited 1,00,000 rupees and it get 7% interest p.a. Calculate the interest after 3 year.
In normal way :-
Years Interest per year Total amount
P*r*t P+SI
1st Year 1,00,000*7%*1= 7,000 1,07,000

2nd Year 1,07,000*7%*1= 7490 1,14,490
3rd Year 114490*7%*1= 8014.3 122504.3
This is the way how we calculate interest in the compound interest.Here you can see after every time calculating interest
and then in next time we calculate interest in total amount. So it is a simple way for calculating but if we want to calculate
for more years so it will be difficult to follow this steps again and again so we use compound interest formula
Formula for compound interest:-
CI= P[(1+i)n-1] Here, P= Initial principal , i= adjusted interest rate , n= no. of periods
i= r%/noccpy n= t*noccpy
Formula for amount :-
A = P(1+i)n
Conversion Period
• In practical it is not necessary that interest be compounded annually.
• In banks the interest is often compounded twice a year (half yearly), after every 6 months.
• The period at the end of which the interest is compounded is known as conversion period,
• No. of conversion period is termed as compounding frequency (noccpy).
Conversion period Description Number of conversion period in a year(noccpy)
12 months Compounded annually 1

6 months Compounded semiannually 2
3 months Compounded quarterly 4
1 months Compounded monthly 12
1 day Compounded daily 365
Effective Rate of interest
Effective interest rate can be defined as the equivalent annual rate of interest compounded annually if interest is
compounded more than once a year.
Formula:- E= [(1+i)n-1] where, i= adjusted interest and n= no. of periods in a year.
WDV Depreciation
In case of WDV method of depreciation, depreciation is calculated as % on WDV at the beginning of the year and amount
of Dep changes every year, this approach is similar of compounding,
Formula:- A= P(1-i)n
Where, P= historical cost of asset, A= Scrap value, n= no. of periods, i= depreciation%
Annuity:-
It can be defined as a sequence of constant periodic payments(or receipts) regularly over a specified period of time.
Practical uses of annuity
• In many cases you must have noted that your parents have to pay an equal amount of money regularly like every month
or every year.
• Example:- payment of life insurance premium, rent of your house, payment of housing loan, etc.
• In all cases they pay/receive a constant amount of money regularly.
Annuity (future and present value) Single cashflow ( SI and CI)
*Regular installment *If single amount is paid or

*Equal amount for received initially and
*Specified period of time *Then direct finally at the end
Ex: RD, EMI, SIP etc. Ex: FD, Short loan etc.
Future value
It is the cash value of an investment at some time in the future. It is a tomorrow’s value of today’s money compounded at the
rate of interest.
Formula:- FV= CF(1+i)n

Where , CF= single cashflow for which FV is to be calculated, i= adjusted interest rate, n=no. of periods
Future value
Future value annuity regular Future value annuity due

Usage:- To calculate final maturity value of an Usage:- To calculate final maturity value of an investment
investment like RD where sum is invested in the annuity like RD where sum is invested in the annuity pattern at the
pattern starting at the end of the period. beginning of each period.
Key word:- at the end of year, month, etc. Key word:- at the beginning of year, month, etc.
Future value
Future value annuity regular Future value annuity due

Formula:- FVAR= (n,i) Formula:- FVAD= (n,i) (1+i)
FVAF= FVAF=
Where, FVAR = future value annuity regular, =Annuity of Where, FVAD=future value annuity due, = annuity value
investment, FVAF= future value annuity factor, i= adjusted installment, FVAF= future value annuity factor, i= adjusted
interest rate, n= no. of periods rate, n= no. of periods
Sinking fund:-
It is the fund credited for a specified purpose by way of sequence of periodic paymets over a time period at a specified
interest rate.
Interest is compounded at the end of every period.
Size of the sinking fund deposit is same as the future value of annuity.
Present value
Present value annuity regular Present value annuity due

usage:- to calculate loan amount when periodic usage:- to calculate loan amount when periodic
installments value are given and vice versa. Ex:- leasing, installments value are given and vice versa. Ex:- leasing,
capital expenditure etc. capital expenditure etc.
keyword:- at the end of the year, month, etc. keyword:- at the beginning of the year, month, etc.
Formula:- PVAR= PVAF (n,i) Formula:- PVAD=[ PVAF (n-i),i}]+

PVAF= PVAF=
Where, PVAR = present value annuity regular, =Annuity of Where, PVAD = present value annuity due, =Annuity of
investment, PVAF= present value annuity factor, i= adjusted investment, PVAF= present value annuity factor, i= adjusted
interest rate, n= no. of periods interest rate, n= no. of periods
Calculator trick for PVAF=

1+i / ==….n-times GT
Net present value

Formula:-NPV= Present value of cash inflow- Present value of cash outflow
Decision base
If NPV ≥ 0, accept the proposal otherwise reject the proposal.
Real rate of return
It is named so to show what a lender or investor receives in real terms after inflation is factored in.
formula:- Real rate of return= Nominal rate of return- Rate of inflation
Perpetuity and Growing perpetuity

An annuity that continues till infinite period of time is called as Perpetuity. And we can calculate PV of Perpetuity and FV of
Perpetuity is not defined.
Formula:- PVP= where, Ai= annuity value (installment
), i= adjusted interest rate.
A stream of cashflows that grows at constant rate forever is known as growing perpetuity
Formula:- PVGP= where, g= growth rate
Valuation of Bond
Present value of interest income and maturity value is compared with the issue price of bond.
Terms:-
Bond- it is a debt security. Type of loan take by company from public. Like debentures.
Face Value- Value written on the document of bond. This value is used to calculate interest amount.
Issue price- Actual payment made to purchase the bond.
Maturity value- Amount to be received on redemption or maturity of bond.
CALCULATOR TRICKS:-
1. For power = Base * = = =….
2. For Reciprocal= Divide =
3. For any root= Base √ √ √….12 times.. -1 divide n… +1 *= *= *=..12 times
4. For any power(including non integer)= Base √ √ √…12 times… -1*n…+1 *= *= *=…12 times

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TIME VALUE AND MONEY

Why interest is paid

1st Year 1,00,0007%1= 7,000 1,07,000

12 months Compounded annually 1

Regular installment If single amount is paid or

Formula:- FV= CF(1+i)n

Future value annuity regular Future value annuity due

Future value annuity regular Future value annuity due

Present value annuity regular Present value annuity due

Formula:- PVAR= PVAF (n,i) Formula:- PVAD=[ PVAF (n-i),i}]+

Calculator trick for PVAF=

Net present value

Perpetuity and Growing perpetuity

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