The Time Value of Money (TVOM)

Technical Reference Material

This tutorial reviews the basic 'Time Value of Money' (TVOM) or 'interest rate' formulas. It consists of 13 pages organized as follows:

• Overview - What is the time value of money?
  • The Basic Concept
  • Definitions
• Present Value of Single Sum - What is present value of $1 that will be received at a specified time in the future?
  • Formula
  • Example
  • Compounding frequency
  • Solving for other variables
  • Programming languages
• Future Value of Single Sum - What is the future value of $1 that is invested today?
  • Formula
  • Example
  • Compounding frequency
  • Solving for other variables
  • Programming languages
• Present Value of an Annuity - What is the present value of a stream of payments?
  • Formula
  • Example
  • Compounding frequency
  • Solving for other variables
  • Programming languages
• Future Value of an Annuity - What is the future value of a stream of payments
  • Formula
  • Example
  • Compounding frequency
  • Solving for other variables
  • Programming languages
• Annuity Due - What is an annuity due and how is it different from an ordinary annuity?
  • Distinction between an ordinary annuity and an annuity-due
  • Calculating the value of an annuity-due
  • Visual comparison of cash flows
• The Miracle of Compounding - How does frequency and term influence the effect of compounding?
  • Compound growth
  • Compounding frequency
  • Term
• Continuous Compounding - How is a 'continuous' compounding frequency calculated?
  • Continuous compounding
• Discount Rate - How do I choose a discount rate?
  • Discount rate
  • Factors affecting the discount rate
  • Differences among interest rates
  • The yield curve and yield to maturity (YTM)
  • Spot rates
  • Term structure of interest rates
  • Forward rates
  • Distinction among YTM, spot rates and forward rates
  • Taxes
  • Summary
• Uneven Payments - What happens when payments are not equal?
  • Uneven payments
  • An example of uneven payments: bond valuation
• Loan Amortization - How do I amortize a loan?
  • Using Excel to Amortize a Loan
  • Manual calculation of payment amount
• Dave's Tips - How can I make TVOM calculations easier to work with?
  • Synchronize the interest rate
  • Don't make it more complicated than it is
  • A picture is worth a thousand words
  • Understand the assumptions
  • Break the problem up into pieces
  • Use an appropriate discount rate
  • Document and check your work
  • Distinguish between forest and trees
• Quick Reference - What was that formula again?
  • Present value of single sum
  • Future value of single sum
  • Present value of an annuity
  • Future value of an annuity
  • Continuous compounding
  • Discount factor
  • Annuity-due
  • Algebraic identities