TIME VALUE OF MONEY (CONTINUED)

FV=PV(1+I)^N

Example 1
How much will $1000 deposited into a savings account with 5% APY, compounded monthly
will grow to after 2 years?

PV = -1000
I = 5% / 12 = 0.004166667
PMT =
N = 2*12= 24
FV= ? = PV(1+I)^N = 1000(1+0,42%)^24 = 1104.9413356
FV = ? Using excel = 1,104.94
For now, use "0" for type.

Time line: I = 5% APY, compounded monthly

PERIOD 1 24

CASH FLOW PV = -1000 FV = 1104,94

Example 2
Today's balance in a savings account is equal to $2500. The account pays an annual interest of 6%, compounded
monthly. How much was deposited into the account 7 years ago?

PMT =
FV = 2500
N = 7 * 12 = 84
I = 6% /12 = 0.005
PV = ? =
FV=PV(1+I)^N
PV = FV / (1+I)^N = 2500 / (1+0,5%)^84 = 1644.34
OR PV = PV function in Excel = -1,644.34

Time line: I = 6% APY, compounded monthly

PERIOD 1 84

CASH FLOW PV = ? = -1644,34 FV = 2500

Example 3
How long would it take for $3000 to grow to $8000 if deposited into a savings account with an annual interest
rate of 4%, compounded monthly?

PMT =
FV = 8000
PV = -3000
I = 4% / 12 = 0.33% per month
N = ? = using a formula

FV=PV(1+I)^N
FV/PV = (1+I)^N
ln (FV/PV) = N*ln(1+I)
N= ln (FV/PV) / ln (1+I) = ln (8000/3000) / ln (1+0,33%) = 294.7389185 periods (months) / 12 =
N = using Excel formula = nper() = 294.73891853 periods (months) / 12 = 24.56157654

Time line: I = 4% APY, compounded monthly

PERIOD 1 N = ? = 294,74 periods (months)

CASH FLOW PV = 3000 FV = 8000

Example 4
What is the annual interest rate on a savings account, compounded monthly if an initial deposit of $1000 3 years ago
has now grown to $1500?

PMT =
FV = 1500
PV = -1000
N = 3 * 12 = 36
I = ? = using formula
FV=PV(1+I)^N
FV/PV=(1+I)^N
(FV/PV)^(1/N) = 1+I
I = ((FV/PV)^(1/N) ) -1 = (1500/1000)^(1/36) - 1 = 1.13% per period x 12 =

I = using excel = RATE() = 1.13% per period x 12 = 13.59% per year

Time line: I = ? APY, compounded monthly

PERIOD 1 N = 36

CASH FLOW PV = -1000 FV = 1500

Example 5
How much money would one be able to save until retirement if the equivalent of one cup of coffee per day ($3)
were to be invested into something that mimics the US stock market, close to 10% a year?
There are 40 years left until retirement.

PMT = 3 * 365 = -1095

PV =
I= 10%
N= 40
FV = ? Using excel = 484,638.85

(THIS IS CALLED AN ORDINARY ANNUITY)

(ANNUITY IS OPPOSITVE OF SINGLE CASH FLOW)
Time line: I = 10% APY, compounded annually
PERIOD 1 N = 40

CASH FLOW PV = 0 PMT = -1095 PMT = -1095

FV = ?
(AN ANNUITY DUE WOULD LOOK LIKE THIS:)
Time line: I = 10% APY, compounded annually
PERIOD 1 N = 40

CASH FLOW PMT = -1095 PMT = -1095 FV = ?

PV = 0

Example 6
Michael borrows $10000 from a local bank at 4% a year, with equal monthly payments for 2 years. What is the amount
equal monthly payment?

PV = 10000
FV = (it means that by the end of year 2, we will have completely paid back the bank)
I = 4% /12 = 0.003333333 per period
N = 2 *12 = 24 periods
PMT = ? = PMT () = -434.24922 per month

Let's build an amortization schedule for this loan.

Beginning Principal part Interest part Ending

Period balance Payment of payment of payment balance
1 10000 434.25 400.91666667 33.33333333 9599.083333
2 9599.08 434.25 402.25 32.00 9196.83
3 9196.83 434.25 403.59 30.66 8793.24
4 8793.24 434.25 404.94 29.31 8388.30
5 8388.30 434.25 406.29 27.96 7982.01
6 7982.01 434.25 407.64 26.61 7574.36
7 7574.36 434.25 409.00 25.25 7165.36
8 7165.36 434.25 410.37 23.88 6755.00
9 6755.00 434.25 411.73 22.52 6343.26
10 6343.26 434.25 413.11 21.14 5930.16
11 5930.16 434.25 414.48 19.77 5515.68
12 5515.68 434.25 415.86 18.39 5099.81
13 5099.81 434.25 417.25 17.00 4682.56
14 4682.56 434.25 418.64 15.61 4263.92
15 4263.92 434.25 420.04 14.21 3843.88
16 3843.88 434.25 421.44 12.81 3422.44
17 3422.44 434.25 422.84 11.41 2999.60
18 2999.60 434.25 424.25 10.00 2575.35
19 2575.35 434.25 425.67 8.58 2149.69
20 2149.69 434.25 427.08 7.17 1722.60
21 1722.60 434.25 428.51 5.74 1294.09
22 1294.09 434.25 429.94 4.31 864.16
23 864.16 434.25 431.37 2.88 432.79
24 432.79 434.25 432.81 1.44 -0.02
5% APY, compounded monthly
24

FV = 1104,94

t of 6%, compounded

6% APY, compounded monthly

84

FV = 2500

an annual interest
 24.5615765442 years
years

4% APY, compounded monthly

? = 294,74 periods (months)

FV = 8000

posit of $1000 3 years ago

13.59%
per year

? APY, compounded monthly

N = 36

FV = 1500

of coffee per day ($3)

 10% APY, compounded annually
N = 40

PMT = -1095
FV = ?

10% APY, compounded annually

N = 40

FV = ?

2 years. What is the amount

id back the bank)

Example 1
How much will $1000 deposited into a savings account with 5% APY, compounded monthly
will grow to after 2 years?

PV = -1000
I = 5% / 12 = 0.004166667
PMT =
N = 2*12= 24
FV= ? = PV(1+I)^N = 1000(1+0,42%)^24 = 1104.941336
FV = ? Using excel = 1,104.94
For now, use "0" for type.

Time line: I = 5% APY, compounded monthly

PERIOD 1 24

CASH FLOW PV = -1000 FV = 1104,94

Total intetest = 1104.94 - 1000 = 104.94

Simple interest = 1000*5%/12 *24 = 100

Compound interest (interest on interest) = 104.94 - 100 =

pounded monthly

4.94