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Lecture Introduction to finance: Markets, investments, and financial management (14th edition): Chapter 9 - Melicher, Norton

Chapter 9 - Time value of money. This chapter includes contents: Explain what is meant by the “time value of money”, describe the concept of simple interest and the process of compounding, describe discounting to determine present values, | Chapter 9 Time Value of Money © 2011 John Wiley and Sons Chapter Outcomes Explain what is meant by the “time value of money” Describe the concept of simple interest and the process of compounding Describe discounting to determine present values Chapter Outcomes (continued) Find interest rates and time requirements for problems involving compounding and discounting Describe the meaning of an ordinary annuity Find interest rates and time requirements for problems involving annuities Calculate annual annuity payments Chapter Outcomes (concluded) Make compounding and discounting calculations using time intervals that are less than one year Describe the difference between the annual percentage rate and the effective annual rate Describe the meaning of an annuity due (in Learning Extension) Time Value of Money Concepts Important Principle of Finance: “Money has a time value”—money can grow or increase over time and money today is worth less than money received in the future Time Value of Money: Math of finance whereby interest is earned over time by saving or investing money Simple Interest: Interest earned only on the principal of the initial investment Time Value of Money Concepts (continued) Present Value: Value of an investment or savings amount today or at the present time Future Value: Value of an investment or savings amount at a specified future time Basic Equation: Future value = Present value + (Present value x Interest rate) Time Value of Money Concepts (continued) Four Ways to Solve Time Value of Money Problems: “By Hand” Using Equations Financial Calculators Spreadsheet Programs Tables-Based Methods Time Value of Money Example: Simple Interest Basic Information: You have $1,000 to save or invest for one year and a bank will pay you 8% for use of your money. What will be the value of your savings after one year? Basic Equation: Future value = Present value + (Present value x Interest rate) Future value = $1,000 + ($1,000 x .08) = . | Chapter 9 Time Value of Money © 2011 John Wiley and Sons Chapter Outcomes Explain what is meant by the “time value of money” Describe the concept of simple interest and the process of compounding Describe discounting to determine present values Chapter Outcomes (continued) Find interest rates and time requirements for problems involving compounding and discounting Describe the meaning of an ordinary annuity Find interest rates and time requirements for problems involving annuities Calculate annual annuity payments Chapter Outcomes (concluded) Make compounding and discounting calculations using time intervals that are less than one year Describe the difference between the annual percentage rate and the effective annual rate Describe the meaning of an annuity due (in Learning Extension) Time Value of Money Concepts Important Principle of Finance: “Money has a time value”—money can grow or increase over time and money today is worth less than money received in the future