Lecture 6 Flashcards
time value of money principle = ?
money can grow/increase over time if we can save/invest it and earn a return
time value of money definition = ?
math of finance whereby a financial return is earned over time by saving/investing money (often in the form of interest)
present value = ?
future value = ?
present value = value of savings amount today
future value = value of savings amount at a specific future date
simple interest = ?
interest earned only on the principal of the initial investment (fixed)
with simple interest, if someone saved £1000 at a bank with 8% interest annually, how much would be made after a year?
1000 + (1000 * interest rate) = £1080
present value + (present value*interest rate) = future value
compounding = ?
arithmetic process whereby an initial value increases at a compound interest rate over time
compound interest = ?
involve earning interest on interest in addition to the interest on the principal or initial investment
with compound interest, if someone saved £1000 at a bank with 8% interest, how much would be made after 2 years?
future value = present value*(1+interest rate) to the power of however many years
1000*(1+0.08) to the power of 2 = future value
FV =
PV =
FVIF =
PVIF =
future value
present value
future value interest factor
present value interest factor
discounting = ?
arithmetic process whereby a future value decreases at a compound interest rate over time to reach a present value
backwards to compounding
instead of intending to go from present value to future value, discounting intends to find the present value from the future value
how does one discount to determine present value?
present value = future value / (1+r) to the power of the number of years involved
how does one find interest rates?
FV/PV to the power of (1/n) - 1
how does one find time requirements?
n = lnFV/PV / ln(1+r)
