Time Value of Money 11A Grange Building University Park PA 16802 financialliteracypsuedu finlitpsuedu 8148630214 Description Time value of money TVM Money that is available at the present time is worth more than the same amount in the future due to its potential ea ID: 776492
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Slide1
MoneyCounts: A Financial Literacy Series
Time Value of Money
11-A Grange Building
University Park, PA 16802
financialliteracy.psu.edu
finlit@psu.edu
814-863-0214
Slide2Description
Time value of money
(TVM)
:
Money that is available at the present time is worth more than the same amount in the future, due to its potential earning capacity
TVM includes that provided money can earn interest, and any amount of money is worth more than the sooner it is received
Money has a time value attached to it
A dollar was worth more yesterday than today
A dollar today is worth more than a dollar tomorrow
Slide3Learning Outcome
Understand interest rates, types and terminology about TVM
Understand APR (annual percentage rate)
Learn to read an amortization schedule
Understand TVM impact on debts
Understand TVM impact on investments
Slide4What is TVM?
Present Value
(PV)
Future Value
(FV)
The number of period (N)
TIME
MONEY
Interest rate (I)
Slide5TVM simplified
If you invest one dollar (PV) for one year (N) at 6% (I), how much will you receive?
Q
Q
A
A
$1.06 (FV)
What is the present value of $1.06 you expect to receive in one year?
$1.00 (PV)
Slide6Types of interest rates
Simple Interest Rate
Compound Interest Rate
Fixed Interest Rate
Variable Interest Rate
Mixed Interest Rate
Slide7$1,000 invested for ten (10) years at 5% yearly simple interest will yield by the end of ten years?
Q
A
1000 + (1,000 x 0.05 x10) = $1,500.00
Simple Interest Rate
Slide8$1,000 invested for ten (10) years at 5% interest compounded
quarterly (4 times a year) will yield by the end of ten years?
Q
A
1000 + ((1,000 x(1.0125)40) = $1,643.62
Compound Interest Rate
Slide9Fixed Interest Rate
Fixed interest rate is a straight forward rate that remains constant during the life of the loan or investment.
A 30 year mortgage at 4.25%
A 5 year car loan at 6.8%
Slide10Variable interest rate changes during the life of the loan and is usually tied to the prime rate.
It can go up or down depending on the prime rate set forth by the Federal Reserve.Credit card interest rates
Variable Interest Rate
Slide11Mixed interest rate changes from fixed to variable or from variable to fixed.
It has some merits depending on your situation, but it is not a rate you would want to choose for a long-term investment or debt.A 30 year mortgage with low interest for the first 5 years, but you plan to sell and move before the increase in the rate!
Mixed Interest Rate
Slide12What is APR?
APR = Annual Percentage Rate
Interest
Rate
Points
MortgageBrokerFee
OtherCharges
Compare APR credit cards to find the best rate
Slide13What is DPR?
DPR = Daily Percentage Rate
APR
365 days
DPR
Interest charged daily accumulate faster than interest charged monthly or yearly (compounding)
Slide14What is Amortization?
An amortized loan is a loan with scheduled, periodic payments that consist of both principal and interest.
An amortized loan payment pays the relevant interest expense for the period before any principal is paid and reduced.
Slide15I
P
P
P
P
Same amount of payment each month
I
I
I
I
P: Principal
I: Interest
More principal, less interest in next months
Amortization
Slide16Amortization Schedule
Pmt #PaymentPrincipalInterestBalance11,656.61331.611,325.00299,668.3921,656.61333.071,323.54299,335.3231,656.61334.551,322.06299,000.7741,656.61336.021,320.59298,664.7551,656.61337.511,319.10298,327.2461,656.61339.001,317.61297,988.2471,656.61340.501,316.11297,647.7481,656.61342.001,314.61297,305.7491,656.61343.511,313.10296,962.23101,656.61345.031,311.58296,617.20111,656.61346.551,310.06296,270.65121,656.61348.081,308.53295,922.57Year 14,077.4315,801.89
Principal: $300,000.00 Interest Rate: 5.25% Payment Interval: Monthly
# of Payments: 360 Payment: $1656.61
Slide17Impact of TVM on Debt
Debts grows bigger with time!
Debt
TVM
Slide18Opportunity Cost
You can’t have your cake and eat it too!!!
Is the item worth the extra payments
(plus interest) I will have to make to pay it off?
Is the opportunity cost of giving up the potential earning of interest acceptable for my financial goals?
Is acquiring the desired item on credit is more meaningful to my financial freedom and security than saving and investing?
Slide19Impact of TVM on Investment
Investments grow bigger with time!
$$
Invest now
Get more in future
$$
TVM
Slide20Planning for retirement
Planning for retirement is an example for calculating various scenarios
How much money should I invest now to reach a certain annuity in the future?
How much money should I expect to receive if I invest a predetermined amount now?
Slide21Invest Early!
The longer you wait to start investing, the more money you need to invest to reach your goal for a final retirement value
Slide22*Annual Return: 8%
Total Investment
$55,000
$130,000
Final Retirement Value
$615,580
$431,754
Starting Age
25
35
Slide23MoneyCounts: A Financial Literacy Series
Comments and questions
11A Grange Building
University Park, PA 16802
financialliteracy.psu.edu
finlit@psu.edu
814-863-0214