Scribd
Upload
94 views4 pages

Time Value of Money: Concepts in Valuation

1. Time value of money refers to the fact that money available now is worth more than the same amount in the future. Present value and future value are concepts used to value money over time. 2. To calculate present and future values, a basic calculator is used. The parts include memory recall, add and remove from memory, and clear functions. 3. Discounting calculates present value from future value, while compounding calculates future value from present value. Formulas use factors like present value, future value, interest rate, and time.

Uploaded by

Ria Gayle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
94 views4 pages

Time Value of Money: Concepts in Valuation

1. Time value of money refers to the fact that money available now is worth more than the same amount in the future. Present value and future value are concepts used to value money over time. 2. To calculate present and future values, a basic calculator is used. The parts include memory recall, add and remove from memory, and clear functions. 3. Discounting calculates present value from future value, while compounding calculates future value from present value. Formulas use factors like present value, future value, interest rate, and time.

Uploaded by

Ria Gayle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

TIME VALUE OF MONEY

CONCEPTS IN VALUATION

Time value of money refers to the fact that a peso in hand today is worth more than a peso
promised at some time in the future. In Time Value of Money two concepts of valuation is commonly
used: Present Value and Future Value.

In computing for future values and present values, we need to use a basic calculator. Thus, to use
a basic calculator we need to know first the parts of a basic calculator. The parts of basic calculator are:

MRC – Memory Recall and Clear


Can Also be:
MR – Memory Recall
MC – Memory Clear
M+ - Add to Memory
M- - Remove from Memory
GT – Grand Total
C – Clear
AC/CE – All Clear

DISCOUNTING AND COMPOUNDING


Discounting Compounding
Definition: From today’s value to future From future value to today’s
value value
Use: To determine how much should To determine the amount of
be invested to make a particular earnings to be gained by making
return in the future. an investment.

Value: Present Value (PV) Future Value(FV)


Computation: Principal x PV Factor Principal x FV Factor
PATTERNS OF CASH FLOW
 Single Amount: A lump sum amount either held currently or expected at some future date.
 Annuity: A level periodic stream of cash flow.
 Mixed Stream: A stream of unequal periodic cash flows.

What PV / FV Factor should be used in a particular type of cash flow?


Time Value Factor
Pattern of Cash Flow
Discounting Compounding
Single Amount PV of 1 FV of 1
Annuity
 Beginning PV of Annuity Due of 1 FV of Annuity Due of 1
 End PV of Ordinary Annuity of 1 FV of Ordinary Annuity of 1
Mixed Stream PV of 1 FV of 1

To compute for Present Value(PV), we use this formula:

PRESENT VALUE = Amount x PV Factor

In computing for PV / FV Factor, the following must be observed

 The interest is annual and is represented by r.


 The period is number of times there is a payment and is represented by n.

The

The table below shows the computation of r depending on a period:


Type of Period Computation of r
Annual r = Annual Interest Rate
Semi-Annual r = Annual Interest Rate / 2
Quarterly r = Annual Interest Rate / 4
Monthly r = Annual Interest Rate / 12

The table below shows the computation of n depending on a period:


Type of Period Computation of n
Annual n = No. of Years x 1
Semi-Annual n = No. of Years x 2
Quarterly n = No. of Years x 4
Monthly n = No. of Years x 12

PRESENT VALUE FACTOR AND DISCOUNTING

PV of 1
To compute for PV of 1:
1. Input in your calculator 1+r
2. Press Divide sign () twice
3. Press Equal Sign the number of times as the n

PV of Ordinary Annuity of 1
To compute for PV of Ordinary Annuity of 1:
1. Input in your calculator 1+r
2. Press Divide sign () twice
3. Press Equal Sign the number of times as the n
4. Deduct 1 from the amount in number 3
5. The amount in number 4 should be divided by the rate
6. From number 5 remove the negative sign

Or if your calculator has M+ and MR


1. Input in your calculator 1+r
2. Press Divide sign () twice
3. Press Equal Sign and then M+ the number of times as the n
4. Press MR

Or if your calculator has GT


1. Input in your calculator 1+r
2. Press Divide sign () twice
3. Press Equal Sign the number of times as the n
4. Press GT

Note: Do not forget to clear the memory of your calculator before by pressing M+ or GT before
computing a new PV Factor.

PV of Annuity Due of 1
To compute for PV of Ordinary Annuity of 1:
1. Input in your calculator 1+r
2. Press Divide sign () twice
3. Press Equal Sign the number of times as the n less 1
4. Deduct 1 from the amount in number 3
5. The amount in number 4 should be divided by the rate
6. From number 5 remove the negative sign
7. From number six add 1

Or if your calculator has M+ and MR


1. Input in your calculator 1+r
2. Press Divide sign () twice
3. Press Equal Sign and then M+ the number of times as the n less 1
4. Press MR
5. From number 4 add 1

Or if your calculator has GT


1. Input in your calculator 1+r
2. Press Divide sign () twice
3. Press Equal Sign the number of times as the n less 1
4. Press GT
5. From number 5 add 1

Note: Do not forget to clear the memory of your calculator before by pressing M+ or GT before
computing a new PV Factor.

FUTURE VALUE AND COMPOUNDING

FV of 1
1. Input in your calculator 1+r
2. Press Multiply sign (x) twice
3. Press Equal Sign the number of times as the n less 1

FV of Ordinary Annuity of 1
1. Input in your calculator 1+r
2. Press Multiply sign (x) twice
3. Press Equal Sign the number of times as the n less 1
4. Deduct 1 from the amount in number 3
5. The amount in number 4 should be divided by the rate

FV of Annuity Due of 1
1. Input in your calculator 1+r
2. Press Multiply sign (x) twice
3. Press Equal Sign the number of times as the n less 1
4. Deduct 1 from the amount in number 3
5. The amount in number 4 should be divided by the rate
6. The amount from number 5 should be multiplied to (1+r)

PERPETUITIES
An annuity in which the cash flows continue forever. This happens when the security does not
bear a fixed maturity date.

To compute for the value of the perpetuity:


Cash Flow
Present Value of Perpetuity =
i

In finance, perpetuity is used for calculation in valuation methodologies to find the present value
of a company's cash flows when discounted back at a certain rate.

BONDS AND BOND VALUATION

Bond – is a long-term debt instrument in which a borrower agrees to make payments of principal and
interest, on specific dates, to the holders of the bond.

Bond Indenture – is a legal document that specifies both the rights of the bondholders and the duties of
the issuing corporation

TERMS USED IN A BOND:


 Par value: face amount of the bond, which is paid at maturity.
 Coupon interest rate: stated interest rate (generally fixed) paid by the issuer. Also known as
nominal interest rate.
 Maturity date: years until the bond must be repaid.
 Issue date: the date when the bond was issued.
 Yield to maturity: rate of return earned on a bond held until maturity. Also known as effective
interest rate or effective rate.

VALUATION OF BOND:
PV of Interest
+ PV of Face Amount
= Bond Value

BOND SPECIFIC RISK


 Price risk is the risk that the market price of a bond will fall, usually due to a rise in the market
interest rate.
 Reinvestment risk is the risk that a bond is repaid early, and an investor has to find a new place
to invest with the risk of lower returns.
 Default risk is the risk that a bond issuer will default on any type of debt by failing to make
payments which it is obligated to make
1.

You might also like