Lesson 6

Question 1

Time Value of Money (TVM)

Answer 1

a mathematical concept that determines the value of money, at a point or over a period of time, at a given rate of interest. TVM is primarily about the relationship between future value and present value.

Question 2

TVM Timeline

Answer 2

• Present Value (PV)
• Payments (PMT)
• Future Value (FV
• Periods (N)
• Interest RAte (i)

Question 3

Present Value

Answer 3

the value of the cash flow today in dollars.

Question 4

Payments (PMT)

Answer 4

any recurring payments (income stream or debt repayment).

Question 5

Future Value (FV)

Answer 5

the dollar value at some point in the future, of a current deposit(s), earning a rate of return over a period of time.

Question 6

Periods (N)

Answer 6

number of periods of compounding (e.g., years, days).

Question 7

Interest Rate (i)

Answer 7

the rate earned on an investment or paid on a loan.

Question 8

TVM Variables

Answer 8

• Cash Inflows

- Cash Outflows

Question 9

Future Value Calcuation

Answer 9

FV = PV * (1+i)n

Question 10

Present Value of Future amount

Answer 10

FV/(1+i)n = PV

Question 11

Annuity

Answer 11

An annuity is a recurring cash flow, of an equal amount, and occurs at periodic (but regular) intervals.

Question 12

Ordinary Annuity

Answer 12

This type of annuity is referenced when the first payment is received at the end of a period.

• Most debtor payments
• Many savings contributions to an IRA or 401(k) if regular and recurring and made at month, quarter, or year end.

Question 13

Annuity Due

Answer 13

This type of annuity is referenced when the first payment is received at the beginning of a period. Has a higher future value

• Rents (usually paid in advance)
• Tuition payments (usually paid at the beginning of the term)
• Retirement income (usually paid at the beginning of the month or year)