Time Value of Money

Question 1

Money toady is worth more than in the future.

Answer 1

Inflation erodes purchasing power.

If you have it now rather than later, you can invest it to earn interest.

Question 2

It’s better to pay out money later in time

Answer 2

Debt repayment

Taxes

Question 3

Five types of problems

Answer 3

Future value of a lump sum.
Present value of a lump sum.
Future value of an Annuity.
Present value of an Annuity.
Amortized Loan - Amount of Annuity equal to present or future value

Question 4

Three Ways to save each problem:

Answer 4

Mathematical Formula
Financial Calculator
Use Excel Spreadsheet
All three will give equal answers but with possible rounding differences.

Question 5

Annuity

Answer 5

Series of equal cash flows spaced evenly over time.

Question 5

Ordinary Annuity

Answer 5

The cash payments occur at the end of each time period.

Question 5

Annuity Due

Answer 5

The cash payments occur at the beginning of each time period.

Question 6

Amortized Loan

Answer 6

A loan that is paid off in equal amounts that include principal as well as interest.

Question 6

APY

Answer 6

Annual Percentage Yield
Is the amount of interest on a yearly basis expressed as a percentage.
Includes the effect of compounding.
Should be used to compare products, not the interest rate.