Time Value Money
Chris Kirk
FIN 304
Word Count: 2804
Part I
Time Value Money (TVM) is an extremely important part of each of our lives, and it is also the most important thing that I learned about this semester in my FIN304 class. The main concept of TVM is that $1 earned now is worth more than $1 earned later. This is made true because we are able to invest that $1 we have now in order to make it worth more than $1 in the future. I will cover many different topics of TMV including, but not limited to, timelines, interest, present and future values of money, annuity, and amortization tables. I will also include example equations along with how to use them in your BA II Plus financial calculator (when applicable).
A basic timeline is an easy way for people to visualize different cash flows over a selected period of time. Each timeline should start at the present time (t=0) and continue along from there. Each tick mark should be labeled with the corresponding period. A period could be daily, monthly, yearly, etc. The interest rate is also shown between t=0 and t=1 so it is easily visible and not forgotten. Below is a simple example of a three-year timeline with equal payments of $100 at the end of each period.
0 I% 1 2 3
|----------------|----------------|----------------|
100 100 100
Next we will look at the difference between simple interest and compound interest. Simple interest is almost never used in everyday life but we must know it in order to fully understand the concept of compound interest. First we must understand that:
Interest ($) = Principal x Interest Rate (%).
Simple interest is when interest is taken at the beginning (t=0) and remains the same throughout your timeline. The equation is as follows: where V0 is the present value of money, n is the number of periods, and I...