Financial Mathematics

Time Value of Money

• TVM - one of the most

important concepts in
personal finance decision-
making.
• Money does not have the
same value over time as it
earns interest & its value
is diminished by inflation

2
let’s understand how money works better

So that we don’t get into debt trap

Time Value of Money (TVM)
“The concept of Time Value of money is based on the premise that
money available in the present time is worth more than the same
amount in the future primarily due to its earning capacity in the future.”

Some key assumptions in TVM:

• Money earns positive rate of return…
• Any amount of money is worth more the sooner it is received…
• Interest on Interest

So What Makes You Happy?

Option 1 Option 2

Rs. 1000 Rs. 1000

TODAY TOMORROW
What you should really know
• Be comfortable with following functions in Spread
Sheet or Financial Calculator PV, FV, PMT, NPV,
Power, NPER, RATE

• Understand when to apply which function

• The mathematical concept behind these function

Time value of Money
• FV

• PV

• RATE

• NPER

• PMT

• What do they stand for ?

Simple interest

If Madan gives Neeraj Rs 1000 for the period of 5

years and Neeraj agrees to pay 10%.

What is the amount of interest that Madan will get

= Principal * Interest * Time
= 1000 * 10% * 5 = 500/-
Simple interest
• Ram gave his sister Rs.50000 for six months, if the
interest rate is 8% per annum, how much should
she give to Ram after six months.

• Mohan gave his friend Rs.100000 and after 5 years

Mohan got Rs. 200000 back, calculate the simple
interest he got per annum.
Compounded annualized growth
rate
• If Rs.1000 is invested for 3 yrs, @ 10% per annum,
interest is to be paid at the end of each year. Total
amount to be received for 3 yrs is Rs.300, if it is
requested that the interest payable is added in the
principal at the end of each year and then interest
should be paid on the new principal in the next
year.

• Interest on interest
Compounded annualized growth rate

Amount = P ( 1 + R / 100) n

P – Principal
R – Return
N – Time
Amount – Principal + Interest
 Always remember rule of 72!
Helps you to approximately calculate number years it takes to
double your money given the rate of interest..
Or
Helps you to calculate the interest rate required to double your
money given the number of years

Answer:
If interest rate is ‘r’ then it will require 72/r years to double the
money

Lets Check out few examples

How many years will it take for
sum of Rs.10,000/= to become
Rs. 40,000/= assuming that the
amount is invested in a Bank
deposit paying 9% interest
Apply rule of 72!
• Number of years to double the money
- “72/r” where r is the rate of interest

• Hence
- It will take 72/9 = 8 years for the money to become 20,000

- And another 8 years for 20,000 to become 40,000

- So a total of 16 years @ 9% for Rs 10,000 to become Rs 40,000
What is the rate of interest offered
by National Savings certificate
which promises to offer double
the money in 8.5 years?
Applying the rule of 72!
• Rate of Interest for doubling the money
- 72/n where n is number of years

• Hence rate of interest offered by NSC

- 72/8.5 = 8.47%
 Always remember rule of 69!
Helps you to approximately calculate number of
years it takes to double your money given the
continuous compounding interest rate..

Helps you to calculate the interest rate required

to double your money given the number of years

Answer:
If interest rate is ‘r’ then it will require 69/r years
to double the money
Confidential
Thank You