Topic 3 (Additional)

INTRODUCTION TO TIME VALUE OF MONEY

Why do you like money?

WHAT IS MONEY?
the value of
Money has TIME value
Are you willing to lend me RM100 if I promise to pay you back the
same amount of money after 1 year?

0 ?? 1

Which would you rather have?

• $100 today
• $100 one year from today
 Money TIME Value
has

RM100 95 bottles
After 1 year… RM100

X 100 bottles X ?? bottles

RM1 RM1.05

0 1 Year
Money has TIME value
Are you willing to lend me RM100 if I promise to pay you back the
same amount of money after 1 year, even if there is no inflation?

0 ?? 1 X 105 bottles
RM1
Money has TIME value
Conclusion
RM100 in hand right now is worth more In 2000, $100 buys 40 Big
than RM100 one year from today for se Macs ($2.50 each)
veral reasons: In 2018, $100 buys 28 Big
Macs ($3.57 each)
1) Inflation: Money loses value
2) Interest: Money grows over time

• $100 invested in an S&P indexed stock fund

in 2000 would be worth approximately $338
today
• $100 today is worth $100 today
The concept of int
erest rate
Fifty-three years ago, Jerry's Uncle
Leo stiffed Jerry's mother out of $50.
Jerry’s father was eager to get it
back for a reason.

Watch the video clip and answer the

following questions.

(a) How much money did Uncle Leo owe Jerry’s mom?
(b) How many years have passed?
(c) What did Jerry’s dad say that money was worth now?
(d) How do you think he figured that out?
The concept of interest rate
Simple interest

If you save RM100 in a bank and the bank is paying you interest rate of 5%,
how much do you have in your bank account at the end of 1 year?

 
The concept of interest rate
Simple interest

If you save RM100 in a bank and the bank is paying you interest rate of 5%,
how much do you have in your bank account at the end of 53 years?

 
The concept of interest rate
Compound interest

Simple interest

…
The concept of interest rate
Compound interest

Justify the worth of the money owed by Jerry’s uncle to Jerry’s mother
after 53 years.

212
  5%
𝐴53 = 50 1+ (
4 ) =696.17
Future value
Assume a $1,000 investment is held for five years in a
savings account with 10% simple interest paid annually.
How much in total do you have in your account after 5
years?

• Future value (FV) is the value of a current asset at a future date based
on an assumed rate of growth.
• The future value (FV) is important to investors and financial planners
as they use it to estimate how much an investment made today will be
worth in the future.
Future value
Assume a $1,000 investment is held for five years in a
savings account with 10% simple interest paid annually.
How much in total do you have in your account after 5
years?

Year Beginning Interest Ending Accumulated interest

1 $1,000 $100 $1,100 $100
2 1,100 110 1,210 100+110=210
3 1,210 121 1,331 100+110+121=331
4 1,331 133.1 1,464.1 464.1
5 1,464.1 146.41 1,610.51 610.51
Future value
Assume a $1,000 investment is held for five years in a
savings account with 10% simple interest paid annually.
How much in total do you have in your account after 5
years?

0 1 2 3 4 5
1,000 1,610.51
Future value

Conclusion

• How much you have now?

• What the interest rate is?
• How many years?
Present value
If you can buy 100 bottles of mineral water with RM100 in
one year’s time, how much money you need to buy the
same number of bottles now? Assume inflation rate of 4%.

 
? NOW RM100 in one
year’s time

0 1
? RM100
Present value
Assume you need RM5,000 in five years for a trip to Seoul.
If bank can offer you 4% p.a. , how much do you need to
save now?

0 1 2 3 4 5
4,109.64 5,000
Present value
Future value
Present value
  𝑭𝑽
𝑷𝑽 = 𝒕
(𝟏 +𝒓 )
Number of period

Interest rate
Attempt Part 1 of the t
utorial questions now.
 Assume r = 10% p.a.

0 1 2 3
PV= 4,545.45 5,000 2,000 2,500
 PV= 1,652.89
 PV= 1,878.29

Total PV = 4,545.45 + 1,653.89 + 1,878.29

=8,077.63
 Assume r = 10% p.a.

0 1 2 3 10
5,000 5,000 5,000 … 5,000

 Total PV =

 Total PV =
 Annuities

0 1 2 3 10
X X X … X

Finite series of equal payments that occur at regular intervals

  𝟏
𝟏− 5,000 5,000 5,000 5,0
( 𝟏 + 𝒓 )𝒕   + + + …+
𝑷𝑽𝑨 = 𝑿 ∙ 1.1 2 3
𝒓 1.1 1.1 1.
 Assume r = 10% p.a.

0 1 2 3 10
5,000 5,000 5,000 … 5,000

 Total PV =

  1

𝑃𝑉𝐴 =
5,000 1 −
( ( 1 +0.1 ) 10 ) =30,722.84
0.1
 Assume r = 10% p.a.

0 1 2 3
5,000 5,000 5,000

Total FV  
5000
2
 
( 1.1 )+5000 ( 1.1 ) 1
 
+5000 ¿ 16,550
=
  ( 𝟏+ 𝒓 ) 𝒕 − 𝟏
𝑭𝑽𝑨 = 𝑿 ∙
𝒓

  (1 +0.1 )3 − 1
𝐹𝑉𝐴 =5,000 ∙ =16,550
0.1
 Application of time
value of money

You just found a job that pays you RM3,0

00 per month. If you plan to use 50% of
your salary to pay for your house monthl
y instalment for the next 35 years.

Calculate the price of the house that you

can afford to buy. Assume you are
sponsored for RM100,000 down payment
and the bank is charging you 5% p.a.