Unit 4

Time Value of Money

• Is a dollar today worth more than a dollar tomorrow?
  Yes
• Why?
• Opportunity cost & Inflation
• This is the reason for charging and paying interest.
• Let v=future value of money
  p=present value of money
  r=real interest rate (nominal rate - inflation rate) expressed as a decimal
  n=years
  k=number of times interest is credited per year
• The Simple Interest Formula
  v=(1+r)ⁿ×p
• The Compound Interest Formula
  v=(1+r/k)^nk×p
• Assume that inflation is expected to be 3% and that the nominal interest rate on simple interest savings is 1% after 1 year.