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Understanding the Time Value of Money in Finance

Learn about the principles of interest, simple and compound interest, and how to calculate future values using charts, formulas, and financial calculators. Connect with Glen Tenney, PhD, for more insights.

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Understanding the Time Value of Money in Finance

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  1. Week 3The Time Value of Money

  2. The Principle of Interest • People have a positive rate of time preference. (Some people more than others) • People must be persuaded to forgo current consumption. • People are willing to pay a premium to get current consumption.

  3. Simple Interest • I = PRT • Interest = Principal X Rate X Time • Most short-term loans use simple interest. • R + T are always in terms of years. • Or portions thereof.

  4. Compound Interest • Same principle as simple interest. • But interest is added to principal periodically. • FV = PV (1+i)n

  5. Three Ways to Calculate • Charts • Here is a sample of both aFuture Value Chartand aPresent Value Chart. • These charts (with different rates) are also in the background materials for this module. • Formula (Given on the previous screen.) • Special Financial Calculators

  6. Good afternoon, good evening, and good night. • Glen Tenney, PhD • glent@gwmail.gbcnv.edu

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