Personal Finance: Chapter 3 Notes
Personal Finance: Chapter 3 Notes FIN 100
Popular in Personal Finance
Popular in Finance
This 2 page Class Notes was uploaded by Lindsay Fialli on Tuesday October 4, 2016. The Class Notes belongs to FIN 100 at Salem State University taught by Terrance Doyle in Fall 2016. Since its upload, it has received 3 views. For similar materials see Personal Finance in Finance at Salem State University.
Reviews for Personal Finance: Chapter 3 Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
Date Created: 10/04/16
Chapter 3: Applying Time Value Concepts The value of money is affected by the point in time it is received Prices of the products you might purchase rise over time due to inflation Money saved receives interest over time The value of a given amount of money is greater the earlier it is received Annuity: a series of equal cash flow payments that are received or paid at equal intervals in time To determine the future value of an amount of money you deposit today, you need to know: o The amount of your deposit (or other investment) today o The interest rate to be earned on you deposit o The number of years the money will be invested Compounding: the process of earning interest on interest Future Value Interest Factor (FVIF): a factor multiplied by today's savings to determine how the savings will accumulate over time o Dependent on the interest rate & the number of years the money is invested o Longer period of time will increase the FVIF o Higher interest rates will increase the FVIF o Equation: FV=PV* FVIFi,n FV= future value of your initial deposit PV= present value (the initial amount of the deposit) i= interest rate per period n= number of periods in which your deposit will be invested (years) An amount of savings can grow substantially as a result of compounding o Can also expand your debt You pay interest not only on your initial debt amount but also on the interest that accumulates over time Deferring (postponing) student loan debt can be bad for you if your loan has an interest rate Debt accumulates over time Discounting: the process of obtaining present values To determine the present value of an amount of money expected in the future, you need to know: o The future amount of money o The interest rate to be earned on your deposit o The number of years the money will be invested Present Value Interest Factor (PVIF): a factor multiplied by a future value to determine the present value of that amount o Less money is needed to achieve a specific future value when the money is invested for a greater number of years o Equation: PV= FV*PVIFin PV= present value ( amount deposited today) FV= amount of money desired for future point in time i= interest rate per period n= number of periods in which your deposit will be invested (years) An alternative way to accumulate funds over time is through an ordinary annuity o Payment shouldn't change over time o Occur at the end f each period Annuity Due: a series of equal cash flow payments that occur at the beginning of each period o Alternative to ordinary annuity Timelines: diagrams that show payments received or paid over time o Best way to show future value of an ordinary annuity Future Value Interest Factor for an Annuity (FVIFA): a factor multiplied by the periodic savings level (annuity) to determine how the savings will accumulate over time o Equation: FVA= PMT*FVIFAin FVA= savings accumulated over time PMT= annuity payment i= interest rate per period n= number of periods in which your deposit will be invested (years) The present value of an annuity can be obtained by discounting the individual cash flows of the annuity and adding them up Present Value Interest Factor for an Annuity (PVIFA): a factor multiplied by a periodic savings level (annuity) to determine the present value of annuity o Equation: PVA=PMT* PVIFAin PVA= present value of annuity PMT= annuity payment i= interest rate per period n= number of periods in which your deposit will be invested (years) The key time value tools for building your financial plan are estimating the future value of annual savings and determining the amount of annual savings necessary to achieve a specific amount of savings in the future The future value of annuity is especially useful when determining how much money you will have saved by a future point in time if you periodically save a specific amount of money each year Your estimated might convince you to save more money each year so that you can build your savings and wealth over time and therefore have more money to spend in the future