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Time Value of Money
Transcript of Time Value of Money
Future Value: Projected value of a
of money at some point in the future
Future VS Present Value
Interest paid both on the original amount of money and on the interest it has already earned
Using a Financial Calculator
A type of investment in which a person pays an amount of money and receives a set of amount of income on a regular basis.
Divide 72 by your interest rate: how many years it will take for your money to double.
Rule of 72
Time Value of Money:
Play your cards right
Don't rely on one single type of investment.
A diversified portfolio will help outweigh the risks overtime
Diversify your investments
low risk = lower returns
high risk = chance for higher returns
Depends on the comfort of the risk taker.
Risk and Return Tradeoff
-Time Value of Money:
Money received today is worth more
than money received next year or
the year after
" Don't work for
work for you"
(how much you can accumulate)
Present Value: Value of a sum of money at the present time
Formula for Future Value
Present value x (1+ interest rate)
n=# of years into the future
Formula for Present Value
Principal/ (1+ interest rate)
n= # of years into the past
Suppose you place $5000 in an account with a 4%
annual return. In 40 years, you will have approximately
Suppose you will receive $5000 as a gift in a year.Assuming at a 5% rate, to calculate how much that money is worth now:
5000/(1+ 0.05) = $4761.90
cash flow=intervals for a fixed period of time
Annuities allow you to calculate how much to save each year for a goal or a payment
Approx: 8% annual return
Average interest on savings account
9 year period
1. What does the Rule of 72 determine?
2. Why is it important to know the future value of your money?
1. What is present value? What is future value?
2. Whats the difference between compound and simple interest?
3. Why is it wise to diversify your investments?
4.True or False
The higher the interest rate of return the less money you accumulate.
What is an "annuity" ?