Time Value of Money
An important financial principle is that thevalue of money is time dependent.This principle is based on the following four reasons:
InflationRiskPersonal Consumption PreferenceInvestment Opportunities
Simple Interest
Simple interest is the interest calculated on the original principalonly for the time during which the money lent is being used.
Simple interest is paid or earned on the principal amount lent or borrowed.
Simple interest is ascertained with the help of the followingformula:Interest = Pnr Amount = P(1 + nr)Where, P = Principalr = Rate of Interest per annum (r being in decimal)n = Number of years
Compound Interest
If interest for one period is added to the principal to get theprincipal for the next period, it is called
‘compounded interest’.
The time period for compounding the interest may be annual,semi-annual or any other regular period of time.
The period after which interest becomes due is called
‘interest period’
or
‘conversion period’.
The formula used for compounding of interest income over ‘n’number of years.A = P (1 + i)Where, A = Amount at the end of ‘n’ periodP = Principal amount at the beginning of the ‘n’ periodi = Rate of interest per payment period ( in decimal)n = Number of payment periods
n
of 00
Fm Time Value of Money
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| Upload Date: | 11/28/2009 |
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