Chapter 3 Time value of Money 3-1
3-1 Chapter 3 Time Value of Money
The Time Value of Money The interest rate o Simple Interest o Compound Interest n Amortizing A Loan 3-2
3-2 The Time Value of Money The Interest Rate Simple Interest Compound Interest Amortizing A Loan
The interest rate Which would you prefer --$10,000 today or $10,000 in 5 years? Obviously, $10,000 today You already recognize that there is TIME VALUE TO MONEY! 3-3
3-3 Obviously, $10,000 today. You already recognize that there is TIME VALUE TO MONEY!! The Interest Rate Which would you prefer -- $10,000 today or $10,000 in 5 years?
Why TIME? Why is TIME such an important element in your decision? TIME allows you the opportunity to postpone consumption and earn INTEREST 3-4
3-4 TIME allows you the opportunity to postpone consumption and earn INTEREST. Why TIME? Why is TIME such an important element in your decision?
Types of Interest n Simple Interest Interest paid (earned on only the original amount, or principal borrowed(lent) o Compound Interest Interest paid (earned)on any previous interest earned. as well as on the principal borrowed (lent) 3-5
3-5 Types of Interest Compound Interest Interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent). Simple Interest Interest paid (earned) on only the original amount, or principal borrowed (lent)
Simple Interest Formula Formula SI= Po((n) SI: Simple Interest Po: Deposit today(=0) Interest Rate per period n: Number of time periods 3-6
3-6 Simple Interest Formula Formula SI = P0 (i)(n) SI: Simple Interest P0 : Deposit today (t=0) i: Interest Rate per Period n: Number of Time Periods
Simple Interest Example Assume that you deposit $1,000 in an account earning 7 simple interest for 2 years. What is the accumulated interest at the end of the 2nd year? s|=P0((n) =$1,000(07)(2) =$140 3-7
3-7 SI = P0 (i)(n) = $1,000(.07)(2) = $140 Simple Interest Example Assume that you deposit $1,000 in an account earning 7% simple interest for 2 years. What is the accumulated interest at the end of the 2nd year?
Simple Interest (FV What is the Future Value(Fv of the deposit? FV =Po+ S/ =$1,000+$140 =$1,140 n Future value is the value at some future time of a present amount of money, or a series of payments, evaluated at a given interest rate 3-8
3-8 FV = P0 + SI = $1,000 + $140 = $1,140 Future Value is the value at some future time of a present amount of money, or a series of payments, evaluated at a given interest rate. Simple Interest (FV) What is the Future Value (FV) of the deposit?
Simple Interest(Pv What is the Present value(Pvof the previous problem? The Present Value is simply the $1, 000 you originally deposited. That is the value today! n Present value is the current value of a future amount of money, or a series of payments, evaluated at a given interest rate 3-9
3-9 The Present Value is simply the $1,000 you originally deposited. That is the value today! Present Value is the current value of a future amount of money, or a series of payments, evaluated at a given interest rate. Simple Interest (PV) What is the Present Value (PV) of the previous problem?
Why Compound Interest? Future Value of a Single $1, 000 Deposit 20000 口10% Simple 15000 Interest 己10000 口7% Compound Interest s5000 口10% Compound Interest 山 1st Year 10th 20th 30th YearYear Year 3-10
3-10 0 5000 10000 15000 20000 1st Year 10th Year 20th Year 30th Year Future Value of a Single $1,000 Deposit 10% Simple Interest 7% Compound Interest 10% Compound Interest Why Compound Interest? Future Value (U.S. Dollars)
