合肥工业大学财务管理原理双语课件Chapter3 The Time Value of Money.ppt

chapter 3 Chapter 3: The Time Value of Money Study objectives The interest rate Simple interest Compound interest Compounding more than once a year Amortizing a loan What does it mean? The chief value of money lies in the fact that one lives in a world in which it is overestimated.H. L. Mencken, from A Mencken Chrestomathy 1.Interest Interest: money paid (earned) for the use of money How does interest come into being? Aversion of future uncertainty Opportunity to invest and make a profit Why shall we know interest in studying FM? In FM, a lot of decisions can be made only according to computations using interest (interest can cause cash flow, and this affect the value of a firm) 2.Interest rate The rate between interest paid (earned) and principal Interest rate is a very important index, both in macro-economy and FM, because both state and company want to make decision by it. 3.Simple Interest Simple interest is interest that is paid on only the original amount borrowed (lent) SI=P(i)(n) The assumption under simple interest: interest earned cannot be invested immediately Future value Future value is the value at some future time of a present amount of money, or a series of payments, evaluated at a given interest rate Why does it appear in FM? Under simple interest, future value is computed as: FV=PV+PV(i)(n) Example Miss Lin wants to buy a small house in three years time, so she leads a thrifty life and saves all her spare money in deposit. As her salary is 1000 a month, she tries to save 7000 yuan each year and the interest rate for this kind of deposit is 2% a year. How much will she get after three years? example FV= 7000×(1+2%×3)+ 7000×(1+2%×2)+ 7000×(1+2%×1) = 7000×(3+12%)=21840yuan Present Value The present value is the current value of a future amount of money, or a series of payments, evaluated at a given interest Under simple interest, the present value is computed as: PV=FV/(1+(i)(n)) example Miss Lin has a friend who works in an insurance company. One day