Time Value of Money Worksheet
University of Phoenix Material
Time Value of Money Worksheet
Refer to: Ch. 1, “Time Value of Money” section of Personal Finance.
Respond to the following questions in 50 to 100 words each.
What is the definition of Time Value of Money? Please define present and future value?
Time Value of Money is the concept of how money increases with interest over a period of time or loses value from inflation due to changes in the economy. For example a dollar today if it is invested will be worth more than a dollar earned tomorrow. This is because the dollar will earn interest and the chances are inflation will increase causing goods to cost more tomorrow than they do today. “The time value of money involves the increase in an amount of money as a result of interest earned.” (Kapoor, Diabay, & Hugues, 2013) The future value of money is the value of money that will be earned with the increase of an interest rate, and a present value of money is the opposite of this.
How does compounding interest differ from present and future value?
The compounding interest in the future value is determined how soon the deposit is made to accumulate interest on the deposit plus accumulation on the interest that is made over the period of time the money is deposited. The sooner the deposit is made the more interested can be accumulated over a period of time to increase a larger return.
Present value is compounded by determining a certain value of money that is desired in a certain period of time. “Present value is the current value for a future amount based on a particular interest rate for a certain period of time.” (Kapoor, Diabay, & Hugues, 2013)
For questions 3 – 5, use the Bankrate Compound Interest Calculator http://www.bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx and input provided figures, changing the interest rate, and the compounding of the interest rate (annually, semiannually, and quarterly) as delineated below:
You place $1,500 in a savings account earning 3% interest compounded annually. How much will you have at the end of four years? How much would you have at the end of four years if interest is compounded semiannually?
At the end of four years you will have $1,688 that is compounded annually. The interest compounded semiannually would be $1,685.
Change the interest rate to a higher rate. How much will you have at the end of four years if interest is compounded annually at a rate of 5%? How much would you have at the end of four years if interest is compounded semiannually?
The end of four years at 5% compounded annually would be $1,823. The compounded semiannually at the end of four years would be $1,815.
Now change the interest rate to a lower rate. How much will you have at the end of four years if interest is compounded annually at a rate of 2.5%? How much would you have at the end of four years if interest is compounded semiannually?
At the end of four years the amount you would have compounded annually at a rate of 2.5% is $1,656 and compounded semiannually it would be $3,375.
Kapoor, J., Dlabay, L., & Hughes, R.J. (2013). Focus on personal finance: An active approach
to help you develop successful financial skills (4th ed.) New York, NY., McGraw-Hill