Podcast
Questions and Answers
What does the time value of money (TVM) concept primarily indicate about present and future sums of money?
What does the time value of money (TVM) concept primarily indicate about present and future sums of money?
In the context of cash flow timelines, what is a cash inflow?
In the context of cash flow timelines, what is a cash inflow?
What is the primary purpose of calculating present value (PV) in financial contexts?
What is the primary purpose of calculating present value (PV) in financial contexts?
Which statement correctly defines future value (FV) in the context of TVM?
Which statement correctly defines future value (FV) in the context of TVM?
Signup and view all the answers
How does the percentage change in value relate to the time value of money?
How does the percentage change in value relate to the time value of money?
Signup and view all the answers
What is the formula to calculate the future value of an investment after two years at a 3% interest rate, starting with a principal of Tk.5000?
What is the formula to calculate the future value of an investment after two years at a 3% interest rate, starting with a principal of Tk.5000?
Signup and view all the answers
What is the value of Tk.5000 after three years with a 3% annual interest rate?
What is the value of Tk.5000 after three years with a 3% annual interest rate?
Signup and view all the answers
How much interest will be earned after two years on an investment of Tk.5000 at a 3% interest rate?
How much interest will be earned after two years on an investment of Tk.5000 at a 3% interest rate?
Signup and view all the answers
Which statement accurately describes compound interest?
Which statement accurately describes compound interest?
Signup and view all the answers
Which of the following represents the value of Tk.5000 after four years at an interest rate of 3% when using the compounding formula?
Which of the following represents the value of Tk.5000 after four years at an interest rate of 3% when using the compounding formula?
Signup and view all the answers
Study Notes
Time Value of Money (TVM)
- TVM concept states that current money is worth more than the same amount in the future due to earning capacity.
- Money can earn interest, making earlier receipts more valuable.
Cash Flow Timelines
- A cash flow timeline visually represents the timing of cash inflows and outflows.
- Cash outflow represents payments for expenses or investments, while cash inflow is money received from investments or employers.
Future Value (FV) and Present Value (PV)
- Future Value (FV): The amount a cash flow will grow to over time with compounded interest.
- Present Value (PV): The current value of future cash flows, calculated using the formula ( PV = \frac{FV}{(1 + r)^n} ).
Compounding Interest
- Compounding involves earning interest on both the initial principal and previously earned interest, resulting in increased total value over time.
- Example calculations show values growing with time and interest rate effects, demonstrating the impact of compounding.
Opportunity Cost and Investment Decisions
- Opportunity cost rate reflects returns from the best alternative investment available.
- Investment decisions should consider opportunity cost; if an investment promises a higher return than the cost, it's advisable to proceed.
Solving for Interest Rates and Time
- Equations for PV, FV, rate, and time have four variables: ( PV, FV, r, n ).
- If three variables are known, the fourth can be calculated.
Rule of 72
- A method for estimating the period needed for an investment to double, calculated as ( \frac{72}{r} = n ).
- Useful for quick assessments of investment potential.
Annuities
- Annuity: Equal payment series made at fixed intervals.
- Ordinary (deferred) annuity: Payments at the end of each period.
- Annuity due: Payments at the beginning of each period.
Future Value of an Annuity
- Future value of an ordinary annuity can be calculated by computing the FV of each payment and summing the results.
Perpetuity
- A perpetuity is a bond or investment that pays fixed cash flows indefinitely.
- Example includes British consols, which were perpetual bonds prior to 2015.
Uneven Cash Flow Streams
- Uneven cash flow streams consist of cash flows of varied amounts over time.
- Present Value and Future Value for these streams require summing individual cash flows adjusted for time and interest.
Terminal Value
- The future value of a cash flow stream is termed terminal value.
- Essential for evaluating inconsistent cash flows over specific periods.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Explore the fundamental concepts of the Time Value of Money (TVM) through this quiz. Learn about future values, present values, and important relationships in valuation. Test your understanding of how money's value changes over time and the tools needed to calculate these values.
