Time Value of Money

Time Value Of Money             

"Money has the time value because we can earn interest on it if we invest it.

You Will Never Understand finance until you understand the time value of money"

For example we invest 100 dollars of today's money at interest rate 5% for a year. Then my 100 dollars of today's money will be worth 105 dollars after one year.

In time value of money, we will cover basic concepts

Present Value and Future Value Calculator

Present Value and Future Value Calculator                     
Now you can easily calculate
a) Present Value                                       
b) Future Value
c) Present Value Of an Ordinary Annuity   
d) Future Value of an Ordinary Annuity
Just write the figures in required columns and check out the result

Amortizing a Loan

Amortizing a Loan                   

It is the repayment of interest and principle to put off a loan by maturity.

The distinguish feature of this loan is that it is repaid in equal periodic payments that include both interest and principal.

For Example, suppose you borrow 10000 dollars at 10 percent compounded annual interest to be repaid over the next 5 years. So we need to find equal installment payments at the end of each year for amortization.

So the equation becomes

Compounding More Than Once A Year

Compounding More Than Once A Year                       

To begin, suppose that interest is paid semiannually. If you deposit 100 dollars in a saving account at a nominal 8 percent annual nominal interest rate, the future value at the end of six months would be:

Perpetuity

Perpetuity                       
Perpetuity is an ordinary annuity whose payments or receipts continue forever.

Examples include real estate and preferred stock

Annuities

Annuities              
A series of equal payments or receipts occurring over a specified number of periods. Payments are classified by the frequency of payment dates and they may be weekly, monthly, quarterly or yearly.

There are two types of annuity

1)    Ordinary Annuity

An annuity whose payments are made at the end of each period (e.g. a month, a year)

2)    Annuity Due

An annuity whose payments are made at the beginning of each period.

Examples include deposits in savings, insurance premiums and rent or lease payments

Future Value Or Terminal Value

Future Value Or Terminal Value                     

It is the value of an asset at some future date.

For Example, What would be the future value of an investment $1000 invested at 6% compounded annually after 1(1/4) years?

FV1.25 = $1000(1 + 0.06) power 1.25

FV= $1,075

Now you can calculate your required future Value by just entering figures

Click here

Present Value Or Discounted Value

Present Value or Discounted Value                    

We know that a dollar today is worth than a dollar tomorrow.

An understanding of the present value concept should enable us to answer a question that which would you prefer?

1000 dollar today or 2000 dollars 5 years from now

The answer to this question is that

Interest Rate

Interest Rate                

"It is the money paid for the use of money."

As we know that the objective of management should be to maximize shareholders wealth, and that this depends on the timing of cash flows.

For example