Lesson 4 Flashcards
is the idea that money that is available at the present time is worth more than the same amount in the future, due to its potential earning capacity
Time Value of Money
This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received
Time Value of Money
The money loses its value because of __________
inflation
FV =
Future value of money
PV =
Present value of money
i =
interest rate
n =
no. of compounding periods
t
= no. of years
Present value of money
(divide)
Future value of money
(multiply)
is the value of a current asset at a future date based on an assumed rate of growth.
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.
Future value (FV)
is today’s value of money you expect from future income and is calculated as the sum of future investment returns discounted at a specified level of rate of return expectation.
Present Value (PV)
In the concept of _____________ a period is the
extent of time between compounding periods or
payments.
Time Value of Money
In the concept of Time Value of Money, a period is the
extent of time between ____________ or payments.
compounding periods
Each period represents the payment of an ________ (a
sum of money payable yearly or at other regular
intervals)
annuity
income and a time when the ___________ (the money a company generates on a regular basis)
financial stream
compounds _________
(constitutes).
The _______________________ in each
period must also be considered since it is a vital factor
in the formula of money’s time value.
number of compounding periods
1 period in a year (one year)
Annually
2 periods in a year (January to June, July to December)
Semi-annually
4 periods in a year (Jan.-Mar. / Apr.- Jun. / Jul.-Sep. / Oct.-Dec
Quarterly
12 months in a year (January to December)
Monthly
365 days in a year (number of days in a year)
Daily Compounding
is the amount a lender “charges” for the use of assets
expressed as a percentage of the principal
Interest Rate
For example, if an individual takes out a P300,000
mortgage from the bank and the loan agreement
stipulates that the interest rate on the loan is 15%, this
means that the borrower will have to pay the bank the
original loan amount of P300,000 + (15% x P300,000) =
P300,000 + P45,000 = P345,000. (one-year lending
agreement)
Interest Rate
is the cost of debt for the borrower and the rate of
return for the lender.
Interest Rate
