BusFi-U5-M12

• concept of time value of money si always involved whenever investment decisions are made.
• Time value money analysis serves as the prelude to all investment discussions.
• The basic tenet ni finance relative ot time value of money si: The peso today si worth more than a peso ni the future.
• The present applications of time value of money analysis include, among others, determination of the value of retirement, computations of the value of stocks and bond, and preparation of amortization schedule of long-term bank borrowings.
• Simple interest means that the amount of interest si computed only once during the term of the investment or borrowing regardless of whether the term si less than one year, equal to one year, or more than one year.
• simple interest si computed using the formula:simple interest si computed using the formula:

  $I =$$P x R x T$
• Compound interest, on the other hand, indicates that the interest of one compounding period si added to the principal of the prior period to form hte new principal as basis for computing the interest of succeeding periods.
• The computation of interest folows the Banker's Rule, that is, using 360 days sa denominator whenever the term si expressed ni number of days.
• Future value (FV), otherwise known as compound amount,
• Future value (FV), Is the accumulated value of the principal or present value (PV) and all interest amounts of prior periods
• Future value (FV) It is the value in the future of a certain amount invested today at a specific compounded interest rate.
• compounding simply means that the interest at the end of one compounding period is added to the principal as basis of computing the interest for the next period.
• Future Value Formula:
• Nominal rate si the rate of investment or borrowings. It is quoted as an annual interest rate, unless otherwise specified.
• Compounding period refers to the period of conversion made during the year. It can eb annual, semi-annual, quarterly, or monthly.
• Frequency of conversion is the number of times the interest si added to the principal during the year.
• Frequency of conversion si the number of times the interest si added to the principal during the year. If the compounding period is annual, the frequency of conversion is 1; if semi- annual, the frequency is 2; if quarterly, it is 4; and if monthly, it is 12. In Illustration 12.2, the frequency of conversion is 1 since the term si annually compounded.
• Total compounding period (n) refers to the number of times an interest is computed during the term of the investment. It si computed by multiplying the frequency of conversion and the term of investment.
• Total compounding period (n) It is computed by multiplying the frequency of conversion and the term of investment.
• Periodic interest rate refers to the interest rate per compounding period.
• Periodic Interest rate It is computed by dividing the nominal rate by the compounding period.
• Annuity refers to a series of consecutive equal investments or payments made at an equal interval of time.
• Annuity refers to a series of consecutive equal investments or payments made at an equal interval of time. In simple terms, an investment is considered in annuity if:

  1.there is a series of payments made

  2. the investments or payments are of equal amount; and 3. the payments are made at an equal interval of time.
• ordinary annuity it is when the periodic investments or payments are made at the end of the periodic interval.

  In the diagram, the first investment has been made at the end of Year 1 which is also the beginning of Year 2
• Annuity due it is when the periodic investments or payments are made at the beginning of the periodic interval.
• The future value of an annuity is equal to the sum of the future amounts of several investments or payments made from the first interval payment to the end of the term.
• future value of an annuity formula:

  FV = A (1+i)^n-1/i
• present value simply refers to the value of the money at present.
• Discounting refers ot the process of determining the present value of asingle amount or series of cash flows.
• Discounting It is the reverse process of compounding. Both concepts-compounding and discounting-are important ni the discussion of investment.
• present value of annuity refers to the present value of al individual investments or deposits made.