Provides in depth information on the readinf:1 of CFA, that is Time Value Of Money. It clearly explains the basics of the topic. This will the help the beginners to fully and easily understand the topic.
TIME VALUE OF MONEY
This is level one of the CFA program. The topic on quantitative
methods and the reading on time value of money. I'm guessing that
you learned this way back in kindergarten. If you saved an amount
today and invested in a financial asset that had a positive rate of
return then it's sometime in the future you would have a larger
amount. An investor with 100 today and this investor hopes to
purchase an asset one year from today now if that savings rate is ten
percent the one hundred dollar savings that initial savings will grow to
110 right that's an obvious answer. But what happens if those inputs
are not quite so obvious in other words suppose i changed that one
hundred dollars today to fourteen thousand eight hundred and sixty
two dollars and the savings rate was four point three four six seven
percent how much would that grow to after uh after one year. If we
earn 10 dollars worth of interest the first year then we're going to earn
ten dollars of interest in the second year so you might be tempted to
say that that future purchase amount is going to be 120 right ten and
year one and ten in year two however however however this ignores
the value of compounding. The new shortwave math is much more
efficient than the old long way math.
When you turn it on you probably have two decimals so I want to show
you how to change that quickly so we're going to do a second format.
Hit your second p slash y button that needs to be at one payment per
year, the default is 12. Set your payments per year so that we
compound annually and we'll make some slight adjustments to that as
we go through. Time value of money problems are simple problems
problems that you should be able to get using the old math that I
described to you earlier, but let's go ahead and do this with our
financial calculator. We'll say 5 is n over that time period and 7 is the
interest rate, and then we'll do that here in just a second. Bob saves
500 today, compute the value of the savings in five years if the
relevant interest rate is seven percent. When we're solving for the
interest rate, we need to be super sensitive about positivity and
negativity so watch what I'm going to do here with your calculators.
Bill has 49 today and needs 92 in six years. This is super important
here so let me go down and clear this memory: when we did our very
first calculation, we entered 100 and our answer was a minus 110.
An annuity is a series of consecutive equal payments that begin one
year from today. The interest rate is the minimum rate of return an
investor must receive in order to accept an investment, so we can
view that from your perspective too. Ten percent is the interest rate
that is usually offered, but it doesn't matter which direction they flow
initially or at the end. An interest rate is also used and interpreted as
this term, a discount rate. This is a generic term that is used in time
value of money. I want to break that up into its component parts so
notice that we have five of them here: real riskfree interest rate,
required rate of return, initial rate of return, final rate of return, and
spread.
A real riskfree rate of interest tells us how much better off you want to
be in the absence of inflation. A real interest rate means compensation
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