CHAPTER 10

The
Time Value
Of
Money
 Discussants:

Jhun Paul Ryan M. Cruz

Quennie Kate M. Garabiles

To be Discuss:

INTRODUCTION (SIMPLE
AND COMPOUND INTEREST)
1
NOMINAL vs. EFFECTIVE
INTEREST RATE
2
MAJOR CONCEPTS OF TIME
VALUE OF MONEY
3
INTRODUCTION
Simple and Compound Interest
INTRODUCTION

Inter
•est
Cost of using money over time
• Excess of resources received or paid

Princ
ipal
• The amount of resource loaned or
borrowed
 INTRODUCTION

Interes
t the borrower for the use of the
• Cost of the excess resources to

expense
money

Interest revenue
• Benefit of the excess resources
to the lender of the money
SIMPLE INTEREST
- Interest computed on the amount
the borrower received at the time the
loan is obtained and is added to that
amount when the loan becomes due.

I = Prt
COMPOUND
INTEREST
- Interest paid on both the principal
and the amount of interest
accumulated in prior periods.
 COMPOUNDING PERIOD- period for
computing interest usually at regular state intervals

 INTEREST RATE PER COMPOUNDING

PERIOD- is equal to the nominal interest rate
divided by the compounding periods in one year

A= P ( 1 + I ) ⁿ
Nominal vs. Effective Interest Rate

NOMINAL INTEREST RATE EFFECTIVE INTEREST RATE

- True interest rate & may differ depending on
- simply the stated rate the frequency on compounding

𝑛 𝑖 𝑚
NIR = {1 + 𝑖} EIR = {1 + } -1
𝑚
MAJOR CONCEPT
OF TVM
Future and Present Value
 -gradually increases toward the
-always greater than the
future amount
present value
-a peso available today is
-a peso available at the future
always worth more than a peso
is always worth less than a
that does not become available
peso that is available today
until a future date

FUTURE VALUE PRESENT VALUE

Future Value

Future Value (Annual Compounding)

Determination Of Future Value Using A Table

Future Value (With Intraperiod Compounding)

Determination Of The Future Value Of A Stream

Of Payments
FUTURE VALUE

A. Annual Compounding
𝑛
𝐹𝑉𝑛 = 𝑃𝑉(1 + 𝑖)
B. Determination Of Future Value Using A Table
Compound Amount Table – is useful set of factors that represents the
future value of P1.00 at various interest rates for a number of compounding
periods.

COMPOUND AMMOUNT(FV) = P X TABLE FACTOR

𝐹𝑉𝑛 = 𝑃𝑉(𝐹𝑉𝐼𝐹𝑖,𝑛 )
FUTURE VALUE

C. With Intraperiod Compounding

𝑖 𝑚𝑛
𝐹𝑉𝑛 = 𝑃𝑉{1 + }
𝑚
• Intraperiod Compounding – occurs more than once a year.

• Compounding Period – the calendar period over which

compounding occurs.
FUTURE VALUE

D. Determination Of The Future Value Of A Stream Of Payments

𝑛
I. Involving Stream Of Unequal Payments
𝐹𝑉𝑛 = ෍ 𝑃𝑡 (1 + 𝑖)𝑛−𝑡
𝑡=0
II. Involving Stream Of Equal Payments (Annuity/Fixed Annuity)
a. Ordinary Annuity (Regular/Deferred) – payments occur at the end of each
period.
𝐹𝑉𝑂𝐴𝑛 = 𝐴 (𝐹𝑉𝐼𝐹𝐴𝑖,𝑛)
b. Annuity Due – payments occur at the beginning of each period.
𝐹𝑉𝐴𝐷𝑛 = 𝐴 (𝐹𝑉𝐼𝐹𝐴𝑖,𝑛) (1 + 𝑖)
Discounting

Determination Of PV Using A Table

Determination Of The PV Of A Stream Of Payments

Determination Of The PV Of A Perpetuity

 PRESENT VALUE

A. Discounting
• Discount Rate(Required Rate of Return) – used to find present values.
• Discounting – the process of determining the present value of a future amount.
𝑭𝑽𝒏 𝟏
𝑷𝑽 = or 𝑭𝑽𝒏 =
(𝟏+𝒊)𝒏 (𝟏+𝒊)𝒏

B. Determination Of PV Using A Table

• 𝑷𝑽𝑰𝑭𝒊,𝒏 − 𝐩𝐫𝐞𝐬𝐞𝐧𝐭 𝐯𝐚𝐥𝐮𝐞 𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐟𝐚𝐜𝐭𝐨𝐫 𝐟𝐨𝐫 𝐝𝐢𝐬𝐜𝐨𝐮𝐧𝐭 𝐫𝐚𝐭𝐞 𝐚𝐧𝐝 𝐭𝐢𝐦𝐞 𝐩𝐞𝐫𝐢𝐨𝐝.

𝑷𝑽 = 𝑭𝑽𝒏 (𝑷𝑽𝑰𝑭𝒊,𝒏 )
PRESENT VALUE

C. Determination Of The PV Of A Stream Of Payments

I. Involving Stream of Unequal Payments
𝒏

𝑷𝑽 = ෍ 𝑷𝒕 (𝑷𝑽𝑰𝑭𝒊,𝒕 )
𝒕=𝟏
II. Involving Stream of Unequal Payments
𝒏
𝟏
𝑷𝑽𝑶𝑨𝒏 = 𝑨 ෍ 𝒕
𝒐𝒓𝑷𝑽𝑶𝑨𝒏 = 𝑨(𝑷𝑽𝑰𝑭𝑨𝒊,𝒏 )
(𝟏 + 𝒊)
𝒕=𝟏
PRESENT VALUE

D. Determination Of The PV Of A Perpetuity

Perpetuity – an annuity with an infinite life; that is, payments continue

indefinitely

𝑨𝒏𝒏𝒖𝒊𝒕𝒚 (𝑨)
𝑷𝑽 𝒐𝒇 𝒂 𝑷𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 =
𝑫𝒊𝒔𝒄𝒐𝒖𝒏𝒕 𝑹𝒂𝒕𝒆 (𝒊)
GROWTH RATES
Compound annual growth or
interest rate – another application
of the time value of money
concept of a stream of payments
or receipts.
𝐸𝑛𝑑𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡 (𝐹𝑉𝑛 )
𝐹𝑉𝐼𝐹𝑖,𝑛 =
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡 (𝑃𝑉)
01 Cabrera, M. (2015); Financial REFERENCE:
Management: Principles and
Applications Volume 1; GIC Enterprise
02 & Co, Inc; Recto Avenue, Manila

03 Ballada, W.(2015); Investment Mathematics;

Domdane Publisher & Made Easy Books;

04