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Week 3 The Time Value of Money

Week 3 The Time Value of Money. 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. Simple Interest. I = PRT

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Week 3 The Time Value of Money

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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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