Scribd
Upload
4 views

Topic Two

This study guide covers key financial concepts including Time Preference for Money, Present Value (PV), Future Value (FV), Value of Annuity, and Rate of Return, along with their definitions and formulas. It provides examples for better understanding, such as calculating PV and FV based on given interest rates and time periods. Additionally, it highlights important processes like compounding and discounting in finance.

Uploaded by

sruthi kunam
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
4 views

Topic Two

This study guide covers key financial concepts including Time Preference for Money, Present Value (PV), Future Value (FV), Value of Annuity, and Rate of Return, along with their definitions and formulas. It provides examples for better understanding, such as calculating PV and FV based on given interest rates and time periods. Additionally, it highlights important processes like compounding and discounting in finance.

Uploaded by

sruthi kunam
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Sure!

Here's a concise study guide on the concepts of Value and Return:


1. Time Preference for Money
 Definition: The idea that money available now is worth more than the same amount in the
future due to its potential earning capacity.
 Reason: Money can be invested to earn returns, making it more valuable today than in the
future.
2. Present Value (PV)
 Definition: The current value of a future sum of money or stream of cash flows given a specified
rate of return.
 Formula: $ PV = \frac{FV}{(1 + r)^n} $
o ( FV ) = Future Value
o ( r ) = Interest rate
o ( n ) = Number of periods
3. Future Value (FV)
 Definition: The value of a current asset at a future date based on an assumed rate of growth.
 Formula: $ FV = PV \times (1 + r)^n $
o ( PV ) = Present Value
o ( r ) = Interest rate
o ( n ) = Number of periods
4. Value of Annuity
 Definition: The present value of a series of equal payments made at regular intervals.
 Types:
o Ordinary Annuity: Payments are made at the end of each period.
o Annuity Due: Payments are made at the beginning of each period.
 Formulas:
o Present Value of Ordinary Annuity: $ PV = P \times \left(1 - \frac{1}{(1 + r)^n}\right) \div
r$
o Future Value of Ordinary Annuity: $ FV = P \times \left(\frac{(1 + r)^n - 1}{r}\right) $
o ( P ) = Payment amount per period
5. Rate of Return
 Definition: The gain or loss on an investment over a specified period, expressed as a percentage
of the investment’s cost.
 Formula: $ \text{Rate of Return} = \frac{\text{Current Value} - \text{Initial Value}}{\text{Initial
Value}} \times 100\% $
Key Concepts
 Compounding: The process where the value of an investment increases because the earnings on
an investment, both capital gains and interest, earn interest as time passes.
 Discounting: The process of determining the present value of a payment or a stream of
payments that is to be received in the future.
Examples
1. Present Value Example: If you are to receive ₹10,000 in 5 years and the discount rate is 5%, the
present value is: $ PV = \frac{10,000}{(1 + 0.05)^5} = ₹7,835.26 $
2. Future Value Example: If you invest ₹5,000 at an annual interest rate of 6% for 3 years, the
future value is: $ FV = 5,000 \times (1 + 0.06)^3 = ₹5,955.08 $
These concepts are fundamental in finance and help in making informed investment decisions[1]
[2][3].
Feel free to ask if you need more detailed explanations or additional examples! Good luck with
your exam! 📚😊
[1]: Time Value of Money: Meaning, Concept, Importance and Techniques [2]: Time Value of
Money: What It Is and How It Works - Investopedia [3]: Concepts of value and return | PPT - SlideShare

References
[1] Time Value of Money: Meaning, Concept, Importance and Techniques
[2] Time Value of Money: What It Is and How It Works - Investopedia
[3] Concepts of value and return | PPT - SlideShare

Absolutely! Here are some additional examples to help you understand these concepts better:
Present Value (PV) Example
Suppose you want to know the present value of receiving ₹50,000 five years from now, with a
discount rate of 8%.
Formula: $ PV = \frac{FV}{(1 + r)^n} $
Calculation: $ PV = \frac{50,000}{(1 + 0.08)^5} = \frac{50,000}{1.4693} = ₹34,034.74 $
Future Value (FV) Example
Imagine you invest ₹20,000 at an annual interest rate of 7% for 4 years. You want to find out the
future value of this investment.
Formula: $ FV = PV \times (1 + r)^n $
Calculation: $ FV = 20,000 \times (1 + 0.07)^4 = 20,000 \times 1.3108 = ₹26,216 $
Value of Annuity Example
You plan to save ₹5,000 at the end of each year for the next 6 years in an account that earns 5%
interest annually. You want to calculate the future value of this ordinary annuity.
Formula: $ FV = P \times \left(\frac{(1 + r)^n - 1}{r}\right) $
Calculation: $ FV = 5,000 \times \left(\frac{(1 + 0.05)^6 - 1}{0.05}\right) = 5,000 \times 6.8019 =
₹34,009.50 $
Rate of Return Example
You bought a piece of land for ₹1,00,000 and sold it after 3 years for ₹1,50,000. To find the rate
of return:
Formula: $ \text{Rate of Return} = \frac{\text{Current Value} - \text{Initial Value}}{\text{Initial
Value}} \times 100\% $
Calculation: $ \text{Rate of Return} = \frac{1,50,000 - 1,00,000}{1,00,000} \times 100\% = 50\%
$
Additional Example: Present Value of Annuity
You are to receive ₹10,000 at the end of each year for the next 5 years. The discount rate is 6%.
Calculate the present value of this ordinary annuity.
Formula: $ PV = P \times \left(1 - \frac{1}{(1 + r)^n}\right) \div r $
Calculation: $ PV = 10,000 \times \left(1 - \frac{1}{(1 + 0.06)^5}\right) \div 0.06 = 10,000 \times
4.2124 = ₹42,124 $
These examples should give you a clearer understanding of how to apply these financial
concepts. If you have any more questions or need further clarification, feel free to ask! 😊📘

Sure! Here are some YouTube links that cover the concepts of Time Preference for Money,
Present Value, Future Value, Value of Annuity, and Rate of Return:
1. Time Value of Money - Present Value vs Future Value
o Watch here - This video provides a basic introduction to the time value of money,
explaining how to calculate both present value and future value.
2. Time Value of Money - Present Value and Future Value
o Watch here - This video explores the fundamental concept of the Time Value of Money
(TVM), focusing on Present Value (PV) and Future Value (FV), with practical examples.
These videos should help you get a better grasp of these financial concepts. If you need more
resources or have any other questions, feel free to ask! 😊📚

You might also like