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    Week 3

    Uploaded by

    kayvidalc

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    © All Rights Reserved
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    Week 3

    Uploaded by

    kayvidalc
    8 views15 pages

    Original Title

    1. Week 3

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    8 views15 pages

    Week 3

    Uploaded by

    kayvidalc

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    © All Rights Reserved
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    WEEK 3 Chapter 05

    The Time Value of Money


    Table of Content

    ● Interest

    ● Annuities
    Notation

    ● PMT = Cash Payment

    ● PV = Present Value

    ● FV = Future Value

    ● t = Time

    ● n = Number of Periods

    ● i =Interest Rate
    Simple Interest

    Interest paid on the principal sum only (the


    original amount)
    Formula:
    - I = PV0× i × n
    I = Simple Interest

    - FVn = PV0 + (PV0 × i × n)


    Compound Interest

    Interest paid on an investment is added to


    the principal, so this is the interest on
    interest.
    Formula:

    -
    n
    FVn = PV0(1 + i)
    Simple VS Compound Interest
    Compound Interest
    Example:
    You agree to invest $1,000 in a venture that promises to
    pay 5 percent compound interest each year for 2 years. How
    much money will you have at the end of the second year?
    Compound Interest
    Answer:
    2
    FV2 = $1,000(1 + .05) = $1,102.5
    Or
    FV2 = $1,000(1 + .05)(1 + .05) = $1,102.5
    Present Value

    The current value of your future amount

    Formula:

    - PV0 = FVn[1/(1 + i)n]


    Present Value
    Example :
    Suppose your banker offers to pay you $1000 in 2 years
    if you deposit X dollars today at an annual 5 percent interest
    rate. What is the present value of the $1000?
    Present Value

    Answer:

    PV2 = 1000 [1/(1 + 0.05)2]

    = 907.029
    Present Value
    Example :
    If we want $3,000 three years from now and the
    compounded interest rate is 5%, how much should we invest
    today?
    Present Value

    Answer:
    PV3= 3000 [1/(1 + 0.05)3]

    = 2,592
    Present Value
    Example :
    What is the present value of $1,000 to be received at the
    end of five years, assuming the following annual interest rate?
    a. 4 percent, discounted annually
    b. 4 percent, discounted quarterly
    Present Value

    Answer:
    a. PV=1,000(PVIF4%,5)=1,000(0.822)=822
    b. PV=1,000(PVIF4%,20)=1,000(0.456)=456

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