TIME VALUE Time Value • Interest Rates • Compounding • Discounting • Effective Rates • Annuities • Perpetuities 2 Interest Rates • Types – Bank rate vs. Prime rate – Mortgage rates – Deposit‚ Loan‚ Credit rates • Movement – Demand / Supply – Inflation/ Deflation – Government intervention 3 Main Components 1. Real 2. Inflation 3. Risk *Note: - Risk Free (Rf) = Real + Inflation - Nominal = Rf + Risk Premium 4 Risk Free & Real Rate • Risk Free (Rf) = Real +
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000 in a bank account that pays 10 percent interest annually‚ how much money will be in your account after 5 years? 2. What is the present value of a security that promises to pay you $5‚000 in 20 years? Assume that you can earn 7 percent if you were to invest in other securities of equal risk. 3. If you deposit money today into an account that pays 6.5 percent interest‚ how long will it take for you to double your money? 4. Your parents are planning to retire in 18 years. They currently
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FIN2110 Finance Basics for Managers Fall 2011 Time Value of Money Problems Calculating Future Values Assume you deposit $10‚000 today in an account that pays 6% interest. How much will you have in five years? = $10‚000 (FVIF of 6%‚ 5years) = $10‚000 * 1.3382 = $13‚382 Calculating Present Values Suppose you have just celebrated your 19th birthday. A rich uncle has set up a trust fund for you that will pay you $150‚000 when you turn 30. If the relevant discount
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Fall 2012 Finc 414 (01) Assignment no. : One Time value of money Please solve the attached problems Date of Submission: Monday 10/09/2012 Please: No Late Submission Solved By Sherin Ezant 1. Accumulating a growing future sum A retirement home at Deer Trail Estates now costs $ 185‚000. Inflation is expected to cause this price to increase at 6% per year over the 20 years before G.L. Donovan retires. How
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ASSIGNMENT 1 Time Value of Money: PV & FV for Single Cash Flows 1.- Is this true or false? $100 invested for 10 years at 12% interest is worth more in FV terms than $200 invested for 10 years at 4% interest. (Answer: False) 2.- Megan wants to buy a designer handbag and plans to earn the money babysitting. Suppose the interest rate is 6% and she is willing to wait one year to purchase the bag. How much babysitting money (to the nearest whole dollar) will she need to earn today to buy the bag
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5th edition Glen Arnold Mathematical Tools For Time Value of Money Glen Arnold‚ Corporate Financial Management‚ 5th Edition © Pearson Education Limited 2013 Slide 4.2 Simple Interest and Future Value • Simple interest A sum of £10 is deposited in a bank account that pays 12 per cent per annum. At the end of year 1 the investor has £11.20 in the account. F = P(1 + i) 11.20 = 10(1 + 0.12) where F = Future value‚ P = Present value‚ i = Interest rate. At the end of five years: F
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should record sales revenue in January 2010 of what? Present value of annuity due PVad = [ $80‚000 x f( n=7‚ i=10%)] x (1+.10) PVad = $80‚000 x 4.868 x 1.10 = $428‚384 2.) On January 1‚ 2010‚ Haley co. issued ten-year bonds with a face amount of $2‚000‚000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. What was the total price of the bonds? Requires both Present value of a single sum and ordinary annuity PVss = $2‚000‚000 x f(
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Money Money doesn’t buy happiness but it helps. Money has become one of the main things in our modern life. Some people live their lives to earn money. They work hard‚ trying to earn as much money as they can. Some of them become crazy about it and lose their dignity hunting money. They don’t appreciate such important things as family‚ friendship‚ love and other feelings. Such people become greedy‚ they spend their lives in loneliness. I don’t deny that money influences our life a lot. As W
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Time Value of Money Extra Problem Set 1 1. You are planning to retire in twenty years. You ’ll live ten years after retirement. You want to be able to draw out of your savings at the rate of $10‚000 per year. How much would you have to pay in equal annual deposits until retirement to meet your objectives? Assume interest remains at 9%. [$1254] 2. You can deposit $4000 per year into an account that pays 12% interest. If you deposit such amounts for 15 years and start drawing money
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Present value is where the value on a set date of a future payment is discounted to reflect the time value of money and other factors. This can also apply to a series of future payments. Present value calculations are commonly utilized in business and economics to provide a way to compare cash flows at different times. Present value can be described as the current worth of a future sum of money or stream of cash flows given a specified rate of return. (http://www.getobjects.com) Future cash flows
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