Page 56 - DMGT409Basic Financial Management

Unit 3: Time Value of Money

3.6 Summary Notes

z Time value of money means that the value of money changes over a time.
z It is the sum of money received today is worth more than if the same is received after some
time.

z In compound value concept, the interest earned on the initial principal amount becomes a
part of the principal at the end of a compounding period.
z Interest can be compounded even more than once a year.
z An investor investing money in installments may wish to know the value of his savings
after ‘n’ years. This is called future value of series of cash fl ows.
z In case of present value concept, we estimate the present worth adjusted for the time value
of money.

3.7 Keywords

Annuity: It is a stream of equal annual cash fl ows.
Cash Flow: It is the movement of cash into or out of a business, a project, or a fi nancial product.

It is usually measured during a specifi ed, finite period of time
Compound Interest: When interest is added to the principal, so that from that moment on, the
interest that has been added also itself earns interest.
Compound Value: The interest earned on the initial principal becomes a part of the principal at
the end of a compounding period.
Present Value: In case of present value concept, we estimate the present worth of a future
payment/instalment or series of payment adjusted for the time value of money.

Time Value of Money: Time value of money is that the value of money changes over a period of
time.

3.8 Self Assessment

Fill in the blanks:
1. Simple interest (SI) = P (I) (........................).
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2. According to dividend capitalization approach dividend is paid ........................ .
3. An annuity is a stream of ........................ annual fl ows.
4. ........................ is repayment of loan over a period of time.
5. The nominal rate of interest and ........................ per year is equal.

State whether the following statements are true or false:
6. Current consumption is one of the reasons for time preference of money.
7. Compound value and future value both, are same.

8. There are two rules available to find out double period.
9. Effective rate of interest is more than the nominal rate of interest in single period
compounding.
10. Rule 73 is one of the rules of doubling period.

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