- Understand the reinvestment of interest paid on an investment’s principal
- Understand and calculate Future value (FV) = Present Value (PV) x Amount it has increased by the end of 1 year (1+i)
- Define future value—the value of an investment at some point in the future
- Define present value—the current value in today’s dollars of a future sum of money
- Understand the importance of annual compounding —reinvesting interest at end of each year for more than 1 year
- n is equal to the number of years during which compounding occurs
Chapter 3 – Keown, Arthur, “Personal Finance: Turning Money into Wealth, Prentice Hall Publishing. 6thedition
Texbook PowerPoint (.pptx)
Popeye character Wimpy has been practicing TVM for decades. Who is it that comes out ahead on Tuesday when he pays up?
Time Value of Money (video) (01:14)
A Dollar today is always worth more than a dollar tomorrow. Why is that?
Introduction Time Value of Money:
Compound interest and the time value of money are two important factors to consider when developing a financial plan. This section explains the concept of the time value of money under three assumptions:
- a single payment, lump sum;
- a terminating fixed stream of payments, annuity; and
- a never-ending fixed stream of payments, perpetuity.
Calculations and applications for present value and future value are illustrated using a financial calculator. Using compound interest to generate returns is dependent on three factors:
- length of the investment period
- amount invested, and
- the rate of return, or interest rate.
Finally, amortized loans and perpetuities are discussed and calculated.
Dr. Waller Lecture: Time Value of Money (video) (38:08)
This video covers one of the most fundamental concepts in your financial life. It relates to buying a home, a car, investments, leasing/buying decisions and much more. Watch for how opportunity costs (what you could have been doing instead) impact your financial decisions.
Time Value of Money Lecture PowerPoint (.pptx 2MB 56SL)
Time Value of Money Formulas & Financial Calculations
Provided as additional exercises.
Time Value of Money Math Exercises (.pptx 404KB 21SL)
Work through the equations in this presentation. Try changing a few values to practice these formulas on your own. Imagine what your current checking balance/savings would be in 5 years at a 4.7% rate of return.
Time Value of Money Math Explanations (.pdf 544KB)
This one page document contains a summary and important formulas that support the exercises above.
Time Value of Money Magic (.pptx 636 3SL)
This file has three slides, but 10 steps, so be sure to load it in “presentation mode” in PowerPoint.
Payment Calculations (video) (14:19)
This video lecture is provided to illustrate the use of Excel for time value of money calculations.
Payment Calculation Excel Spreadsheet (.xlsx 250KB 6 sheets of data)
Using Your BA II Plus Calculator
This provides examples and help for the BAII Plus calculator.
Introduction to Financial Calculations (.pptx 603KB 43SL)
Use your financial calculator to follow through these slides. Practice changing values to see their impact.
BA II PLUS™ Calculator Reference Manual (.pdf 1MB 154PP)
A reference for your calculator work should you run into trouble. A bit long to print, but refer to the relevant sections and practice with your calculator.
- The cornerstone of time value of money is compound interest
- Using future-value interest factors from tables, you can determine how much investments will grow over time
- A rise in either the interest rate or the number of years that your money is compounded for increases future values
- An annuity is a equal dollar periodic payment of investment earnings or paying off installment loans