Define an annuity (In time value of money language)
A series of equal payments made in saving to meet a financial goal
Define an annuity due (In time value of money language)
An annuity where payments are made at the beginining of the period (month , quarter, year and so forth)
Define an ordinary annuity (In time value of money language)
An Annuity where payments are made at the end of the period (month, quarter, year and so forth)
The process of interest being earned on increasing sums of principal and interest over time is known as compounding.
Discounting is the process of determining how much a future sum is worth in terms of its present value
TVM Calculations tip
You must at least enter 3 of the 5 main values in TMV to solve for a TVM problem. -PV -FV -PMT -N -I/YR
PV (Present Value)
This is usually a negative input on your calculator when you ar solving for a fuutre value, or when a future value is also and entry into the probem. This is only calculator logic - so that the calculator knows it is in present and not future value - and othersie has no financial relavance in deriving the correct answer to the time value of money problme. This will become clear as you work the problem.
FV (Future Value)
This is usually a positive input on your calculator.
This may be either a negative or positive input depending on the nature of the cash flow payment from the perspecitve of the client. If the payment is a cash out-flow, it is entered in the calculator as a negative; if the payment is a cash inclow, it is entered in the calculator as a positive.
N (number of periods)
When using the 1 P/YR setting for a calculation with greater than one payment (period) per year, multiply the appropriate factor by the number of years. For example, monthly payments for 10 years is entered as 10x12 = 120N
I/YR (interest rate or rate of return)
When using the 1 P/YR setting for a calculation which is greater than one payment (period) per year, divide the annual interest rate by the appropriate number of periods per year. For example, monthly payments with 6% interest compunded montjly is entered as 6/12 = .50 I/YR.
Future value of a single sum
Single sum is the PV and compounded at a specific rate for a period of time to obtain the FV
Present value of a single sum
The value today of a single sum that will be recievd in the futuer when dicounted for a given number of periods and at a given interest rate.
Future sum of an annuity
The accmumulations of funds to meet a future financial goal
Unchanged payments over the entire period of the annuity
Commonly means that the payment increases each year by the amount fo inflation (so as to have a constance or real doola amount)
Rule of 72
Shortcut to figure out how long it will take for an invesment to double 72/# of years = Rate of return needed 72/rate of return = number of years for investment to double.