THE TIME VALUE OF MONEY “A Dollar Today is Worth More than a Dollar Tomorrow”

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Presentation transcript:

THE TIME VALUE OF MONEY “A Dollar Today is Worth More than a Dollar Tomorrow”

Money today will not be worth the same amount in the future Future Value: How much your money will be worth in the future WHAT IS THE TIME VALUE OF MONEY?

Number of Periods – Compounded monthly: multiply the number of periods by 12 – Compounded quarterly: multiple the number of periods by 4 – Compounded semi annually: multiply the number of periods by 2 Rate – Compounded monthly: divide the rate by 12 – Compounded quarterly: divide the rate by 4 – Compounded semi annually: divide the rate by 2 COMPOUNDING

What will $1,500 invested today be worth in eight years if the interest earned on the investment is 7%? The $1,500 that is invested today represented the present value. The amount it will grow at 7% compounded annually by the end of the eighth year will be $2, (the Future Value). HOW DO I CALCULATE IT?

How much would $10,000 compounded semi annually for 5 years at a rate of 10% be worth at the maturity date? The $10,000 will represent the present value. Since the money is compounded semi annually, you must divide the rate (10%) by 2 and multiply the number of periods (5) by 2. Doing this, you should get the answer $16, (the Future Value). CALCULATING WITH DIFFERENT COMPOUNDING