Time Value of Money


 Money has Time value that is to say that money in
hand today is more valuable than money that is
expected to be received in future. This is because of
several reasons.
1. Risk- There is no certainty about the receipt of
money at a later date.
2. Consumption: current consumption is always more
preferred over future consumption
3. Inflation: In periods of inflation a rupee has more
purchasing power than a rupee a year later.
4. Investment: present money can be utilised for
earning additional cash flow through various modes
of investment.
 Compounding


1. Compounding is the ability of an asset to generate
returns which are then re-invested in order to generate
more returns
2. Suppose one makes an investment of Rs 100 and the
annual rate of return is 4%.
3. On completion of one year the total amount available
would be Rs 104
4. After another year the amount would total to Rs 108.16
with compounding of one year becomes principal for
the next year thus enabling money to grow faster.
 Discounting

1. The exact opposite of compounding is discounting
2. It helps us to determine the present value of a
payment that is to be received at a future date
3. It is a technique of calculating the worth of future
payments in todays term.
4. Suppose an amount of Rs 96.15 is invested today at
4% annual rate of return
5. On completion of one year, the total amount would
be Rs 100. Therefore Rs 100 a year later from now is
really worth just Rs 96.15 today
Present Value of a single
Amount

 Present value is an amount today that is equivalent to a future
payment, or series of payments, that has been discounted by an
appropriate interest rate
 Since money has time value, the present value of a promised future
amount is worth less the longer you have to wait to receive it.
 The difference between the two depends on the number of
compounding periods involved and the interest (discount) rate.
 The relationship between the present value and future value can be
expressed as
 PV= FV { 1/(1+ i) }n
 PV- Present Value
 FV-Future Value
 i- Interest rate per period
 n- Number of compounding periods
 Future Value of a single
Sum ofMoney
 Future value of a present single sum of money is the amount
that will be obtained in future if the present single sum of
money is invested on a given date at a given rate of interest.
The future value is the sum of present value and the
compound interest.
 FV= PV x (1+i)n

 FV-future value
 PV-present value
 i-interest rate per period\
 n- number of compounding periods
 Annuity

 An Annuity is the series of equal payments or receipts occurring at
regular intervals of time
 The payments or receipts occurring at the end of each period are
known as Ordinary Annuity
 Payments or receipts occurring at the beginning of each period are
called as Annuity due.
 Present Value of an Annuity
 P[1-(1+r)-n]
r
P- periodic payment
R- rate per period
N- Number of periods
Future Value of Annuity

 This formula is used to calculate what the value at a future date
would be for a series of periodic payments
 FV of Annuity= P[(1+r)n-1]
r
P- periodic payment
R-rate per period
n – number of periods

The future value of an annuity formula assumes that

 The Rate does not change
 The first payment is one period away\
 The periodic payment does not change
Problems on Time Value
of Annuity

 Akshay deposits Rs 50000 with a bank which pays
10% interest compounded annually for a period of 4
years. How much amount he will get on maturity.
 
 Tripathi has invested Rs 600000 in bank deposit for 3
years at 8%. How much will he receive at maturity?
 
 Manohar wants to send his brother to Australia for
further studies after 6 years. He would require Rs
2500000 at that time ( after 6 years). How much
should he invest today if the offered interest rate is
14%?
 
 Mr Shukla deposits Rs 40000 with a bank at 12%
interest compounded quarterly. How much amount
will he get after a period of 6 years?
 
 Kiran deposit Rs 20000 with a bank @ 12% interest
compounded quarterly. How much amount will he get
after a period of 6 years----- Rs 40656

 Find the present value of Rs 75000 to be received at the

end of 4 years at 16% compounded semi annually-----Rs
40520

 Find the PV of Rs 100000 to be received at the end of 5

years at 12% interest compounded quarterly----Rs 55368
 Risk

 Risk implies future uncertainties about deviation
from expected earnings or expected outcome. Risk
measures the uncertainties that an investor is willing
to take to realise a gain from an investment.
 Types of Risk

 Business Risk
 Non business Risk
 Financial Risk
 Financial Risk

 Financial Risk is the one of high priority risk types
for every business. The causes are below
1. Market risk
2. Credit risk
3. Liquidity risk
4. Operational risk
5. Legal risk
Return
