Basic of finance part1 time value of money

Basics of Finance-part one

The Time Value of Money-

Present Value	How much you got now.
Future Value	How much what you got now grows to when compounded at a given rate

I  give you 100 dollars. You take it to the bank. They will give you 10% interest per year for 2 year.

• The Present Value = $ 100
• Future Value = $121.

FV= PV (1 + i )N

Where

• FV = Future Value
• PV = Present Value
• i = the interest rate per period
• n= the number of compounding periods

Example1 -Determine Future Value Compounded Annually
What is the future value of $34 in 5 years if the interest rate is 5%? (i=.05)

• FV= PV ( 1 + i ) ^N
• FV= $ 34 ( 1+ .05 ) ⁵
• FV= $ 34 (1.2762815)
• FV= $43.39.

Example2-Determine Present Value Compounded Annually
you can go backwards too. I will give you $1000 in 5 years. How much money should you give me now to make it fair to me? You think a good interest rate would be 6% (You just made that number up). (i=.06)

• FV= PV ( 1 + i ) ^N
• $1000 = PV ( 1 + .06) ⁵
• $1000 = PV (1.338)
• $1000 / 1.338 = PV
• $ 747.38 = PV

Example 3-Determine Present Value Compounded Monthly
Here's that last one again, but with monthly compounding instead of annual compounding. (i equals .06 divided by 12, because there are 12 months per year so 0.06/12=.005 so i=.005) 

• FV= PV ( 1 + i ) ^N
• $1000 = PV ( 1 + .005) ⁶⁰
• $1000 = PV (1.348)
• $1000 / 1.348= PV
• $741.37 = PV

Here is all about time value of money. You can calculate for half yearly compounding or quarterly compounding.

In case of half yearly compounding take n= 2* no of years

                                                                  I= annual interest/2

ALL OF THE FINANCE WORKS AROUND TIME VALUE OF MONEY

Thanks & Regards

Danish Khan