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Time Value of Money Explained

This document introduces the key concepts of the time value of money, including conventions, simple interest, and compound interest. It discusses that simple interest is rarely used in practice due to its mathematical complexity. The main topics to be covered are the time value of money under compound interest, including lump sum and annuity cases. Lump sum concepts include present value, future value, unknown rate of interest, and unknown time period. Compound interest is used for all time value of money calculations.

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111 views1 page

Time Value of Money Explained

This document introduces the key concepts of the time value of money, including conventions, simple interest, and compound interest. It discusses that simple interest is rarely used in practice due to its mathematical complexity. The main topics to be covered are the time value of money under compound interest, including lump sum and annuity cases. Lump sum concepts include present value, future value, unknown rate of interest, and unknown time period. Compound interest is used for all time value of money calculations.

Uploaded by

rahulravi4u
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

THE TIME VALUE OF MONEY Conventions & Definitions

Introduction
Now, we are going to learn one of the most important topics in finance, that is, the time value of
money. Note that almost every course, which you will take as finance major, depends largely on
the time value of money. Hence, it is a good idea to spend a fair amount of time in learning the
concepts.
Essentially, we will learn the following concepts:
1. The conventions used in the study of time value of money

2. The time value of money under simple rate of interest


The simple rate of interest nowadays is mostly of academic interest. You will seldom find
any transaction either in the real world or in the academics that is based on the simple rate
of interest. In fact, this is a fortunate development in the sense that the only thing that is
simple about the simple rate of interest is its name. Otherwise the mathematical
foundations and the resultant applications are almost impossible to deal with
mathematically. Just to understand its complexity we will devote some time on this topic.
In the simple rate of interest we will learn
a. Future value of an amount
b. Present value of an amount
c. Future value of an annuity
d. Present value of an annuity
3. Compound rate of interest
All the topics in the time value of money that we will learn are under compound rate of
interest. The topic that will be covered can be broadly categorized as in two main
categories
a. The time value concepts under the lump sum case
b. The time value concepts under a series of payments case

In lump sum case we will learn


a. Present value of an amount
b. Future value of an amount
c. Finding the unknown rate of interest
d. Finding the unknown time period

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