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Summary Fina200 Econcordia Notes L2
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Lesson 2 Fina200 Econcordia notes
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FINA200 Personal Finance ©Lesson 2 Time Value of Money (TVM)
Lesson/Chapter sections not subject to examination:
All use of formulas and tables to calculate TVM problems
Use of the formula for interest rate conversion
Quote:
“The key is not spending time, but investing it.” – Stephen R. Covey
Lesson Objectives
1. Explain the difference between simple interest and compound interest
2. Calculate the future value of a single dollar amount that you save today
3. Calculate the present value of a single dollar amount that will be received in the
future
4. Calculate the future value of an annuity
5. Calculate the present value of an annuity
6. Calculate the number of payment periods and the nominal annual interest rate
7. Convert a nominal interest rate to an effective interest rate
LO 1: Explain the Difference Between Simple Interest and Compound
Interest
Money grows over time when you receive a return on your investment. Interest: Is the
“rent” charged for the use of money. There are two ways of computing interest:
Simple interest, where interest earned is not reinvested
Compound interest, where interest earned is reinvested
© May not be copied or duplicated
without the permission of the owner. 1
, Simple Interest is calculated as: I = P x r x t, where:
I = interest earned
P = principal, or present value
r = annual interest rate expressed as a decimal
t = time (in years)
Compound interest is a powerful concept. It is the process of earning interest on
interest.
The money in your account earns interest, but the interest itself also earns
interest – eventually snowballing into a larger and larger base on which to earn
interest.
We will solve TVM problems involving compound interest using the financial
calculator only.
Using Your Financial Calculator*
Use the highlighted row of keys for solving the TVM
problems.
N: number of payment periods
I/Y: nominal (annual) interest rate
PV: principal or present value
PMT: periodic annuity payment
FV: maturity value or future value
CPT: Compute
*Texas Instruments BA II is the calculator used in the
textbook, Note for the final exam: calculator must not be
programmable.
© May not be copied or duplicated
without the permission of the owner. 2
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