WELCOME TO OUR
PRESENTATION
Chapter: 03
Mortgage Loan Foundations:
The Time Value of Money
Group-2
Group members:
SN ID Name
01 1920010 Md. Rabiul Islam
02 1920016 Md. Robiul Islam
03 1920020 Khairul Islam
04 1920023 Biplob Hossain
05 1920025 Md. Sakil Islam
06 1920033 Md. Nahidul Islam
07 1920042 Anjona Rani
08 1920048 Mahbub Hasan Hridoy
09 1920052 Md. Shan Zid Hasan
10 1920058 Mst. Afroza Begum
Time Value of Money
• The relationship between time and money.
• A dollar received today is worth more than a dollar to be.
received tomorrow.
• Time value of money quantifies the value of a dollar through
time.
Future Value
• Compound Interest Basic Components
Earning Interest on Interest
• Basic Components
PV = Initial Deposit
i = Interest Rate
n = Number of Years
FVn = Value at a specified future period
• Future Value General equation:
Example 1:
What is the value at the end of year 5 of $100 deposited
today if the interest rate is 10% compounded annually?
FV5 = $100(1.10)5
= $100(1.61051 )
= $161.05
Future Value
Example 1, Using a Financial Calculator:
• PV = $100
•n =5
• i = 10
• FV = $161.05
Future Value
Semi-Annual Compounding:
In Example 1, what if interest were paid semi-annually instead
of annually?
• There would be two compounding periods in each year.
• There would be a periodic rate to match the multiple
compounding periods.
• The time period would be doubled.
Future Value
Our general equation becomes:
• Where, m = number of compounding intervals in a year
• i/m, is also called the period rate
Future Value
For Example 1: What is the value at the end of year 5 of $100
deposited today if the interest rate is 10% compounded semi-
annually?
= 100(1.62889)
= $162.89
Future Value
• Notice the difference in Future Value when multiple
compounding periods are used:
$162.89 vs. $161.05
• This shows the effect of earning interest on interest.
Present Value
Discounting: Converting Future Cash Flows to the Present
• General Equation:
Present Value
Example 2:
What is the value today of $2,000 you will receive in year 3 if
the interest rate is 8% compounded annually?
=2000(.79383)
=1587.66
Present Value
Example 2, Using a Financial Calculator:
• FV = $2000
•n =3
•i = 8
• PV = $1587.66
Present Value
• Mathematically (Monthly):
Present Value
Example 2, with 8% Compounded Monthly
= 2000(.78725)
= 1574.51$
Present Value
If P/Y is changed to 12
• FV = $2000
• n = 36
•i =8
• PMT = $0
• PV = $ 1574.51
Annuity
• Ordinary Annuity
-Cash flows begin one period from today
• Annuity Due
-Cash flows begin immediately
Annuity: Future Value
General Equation:
FVA Ordinary= PMT ×
FVA Due= PMT ×
Annuity: Future Value
• Example 3:
What is the future value of a 5-year ordinary annuity with
annual payments of $200, evaluated at a 15% interest rate?
= 200(6.74238)
= $1348.48
Annuity: Future Value
Using the Financial Calculator:
• PMT = $200
•n= 5
• i = 15
• FV= $1,348.48
Annuity: Future Value
Mathematically (Monthly) :
FVA Ordinary= PMT ×
FVA Due= PMT ×
Annuity: Future Value
For Example 3, if payments were to be received monthly
= 200(88.5745)
= $17,714.90
Annuity: Future Value
Using the Financial Calculator, if P/Y = 12
• PMT= $200
• n = 60
• i = 15
• FV = $17,714.90
Annuity: Present Value
General Equation:
Annuity: Present Value
Example 4: If you had the opportunity to purchase a $500 per year,
ten-year annuity, what is the most you would pay for it? The interest
rate is 8%.
= 500(6.7100)
= $3355.00
Annuity: Present Value
Mathematically (Monthly):
Annuity: Present Value
For Example 4, if Payments were to be Received Monthly
= $500(82.4215)
= $41,210.74
Time Value of Money – Extensions
Given the basic equations that we have discussed, we can solve
for any missing single variable.
Some common applications:
• Solve for the interest rate (i)
• Compute payments to accumulate a future sum.
• Compute payments to amortize a loan (PMT)
Equivalent Nominal Annual Rate
• ENAR = Equivalent Nominal Annual Rate
• EAY = Effective Annual Yield
Any
questions
THANK YOU
