16634 Chapter Notes - Chapter 2: Nominal Interest Rate, Sinking Fund, Compound Interest
Document Summary
Topic 2 time value of money calculations. The effect of time on the value of money. The time value of money (tvm) defines the concept that money today is worth more than the same amount of money in the future, based on its earnings potential. This principle asserts that money earns interests and grows. For example, invested today at 5% annually would be worth at the end of the year, making it more valuable in the future. Money can earn interest (when invested) but it can also cost interest (when borrowed). There are two ways of dealing with interest calculations: simple interest, compound interest. Simple interest: simple interest is computed only on the original amount borrowed. It is the return on that principal for one time period. Suppose that you have invested for 5 years at 10% per annum compound interest. 1000 x (1 + 0. 1)5 = 1000 x 1. 61051.
