## Objectives:

*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

## Readings

**Chapter 3** – Keown, Arthur, “Personal Finance: Turning Money into Wealth, Prentice Hall Publishing. 6^{th}edition

Texbook PowerPoint (.pptx)

## Opening Vignettes:

*Popeye character Wimpy has been practicing TVM for decades. Who is it that comes out ahead on Tuesday when he pays up?*

*source*

*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.*

## Reflection:

*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*