2009新商贸英语课件6.pptVIP

The Time Value of Money The Time Value of Money The time value of money serves as the foundation for all other notions in finance. It impacts business finance, consumer finance and government finance. Time value of money results from the concept of interest. The time value of money Time 0 1 2 3 4 5 6 Simple interest Simple interest is a topic that most people cover in elementary school. Interest may be thought of as rent paid on borrowed money. Simple interest is calculated only on the beginning principal. For instance, if someone were to receive 5% interest on a beginning value of $100, the first year they would get: .05 x $100 ? – or – ? $5 in interest Simple interest If they continued to receive 5% interest on the original $100 amount, over five years the growth in their investment would look like this: Year 1:? 5% of $100 = $5 + $100 = $105Year 2:? 5% of $100 = $5 + $105 = $110Year 3:? 5% of $100 = $5 + $110 = $115Year 4:? 5% of $100 = $5 + $115 = $120Year 5:? 5% of $100 = $5 + $120 = $125 Compound interest Compound interest is another matter. Its good to receive compound interest, but not so good to pay compound interest. With compound interest, interest is calculated not only on the beginning interest, but on any interest accumulated in the meantime. Compound interest For instance, if someone were to receive 5% compound interest on a beginning value of $100, the first year they would get the same thing as if they were receiving simple interest on the $100, or $5. The second year, though, their interest would be calculated on the beginning amount in year 2, which would be $105. So their interest would be: .05 x $105 ? – or – ? $5.25 in interest This provides a balance at the end of year two of $110.25 Compound interest If this were to continue for 5 years, the growth in the investment would look like this: Year 1:? 5% of $100.00 = $5.00 + $100.00 = $105.00Year 2:? 5% of $105.00 = $5.25 + $105.00 = $110.25Year 3:? 5% of $110.25 = $5