Chapter 9 The Time Value of Money
9-4. Does inflation have anything to do with making a dollar today worth more than a dollar tomorrow?
Inflation makes a dollar today worth more than a dollar in the future. Because inflation tends to erode the purchasing power of money, funds received today will be worth more than the same amount received in the future.
interest factor
the tabular value to insert into the various present value and future value formulas. It is based on the number of periods (n) and the interest rate (i)
9-7. What is a deferred annuity?
A deferred annuity is an annuity in which the equal payments will begin at some future point in time.
Annuity
A series of equal payments made at regular intervals, with interest compounded at a specified rate.
Future value of an annuity
Calculated by compounding each individual payment into the future and then adding up all of these payments
9-3. Why does money have a time value?
Money has a time value because funds received today can be invested to reach a greater value in the future. A person would rather receive $1 today than $1 in ten years, because a dollar received today, invested at 6 percent, is worth $1.791 after ten years.
Present value of an annuity
The amount at a present time that is equivalent to a series of payments and interest in the future. In theory each individual payment is discounted back to the present and then all of the discounted payments are added up, yielding the present value of the annuity
Discount rate
The connecting piece or link between present (today) and future is the interest or discount rate. i is called the discount rate
9-1. How is the future value (Appendix A) related to the present value of a single sum (Appendix B)?
The future value represents the expected worth of a single amount, whereas the present value represents the current worth.
Yield
The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.
9-2. How is the present value of a single sum (Appendix B) related to the present value of an annuity (Appendix D)?
The present value of a single amount is the discounted value for one future payment, whereas the present value of an annuity represents the discounted value of a series of consecutive future payments of equal amount.
Compounded semiannually
a compounding period of every six months. the interest or return is accumulated every six months. (added to or combined)
Present Value (PV)
is what money at some point in the future is worth today
Future Value (FV)
is what money today will be worth at some point in the future
