Present Value and Future Value of Annuity Due

In an annuity due, the first cash flow occurs at the beginning (at time 0). We can use our BA II Plus calculator to calculate the present value and future value of the annuity due using the same procedure as above, just by making one minor adjustment. By default the...

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Present Value and Future Value of Ordinary Annuity

An annuity refers to a series of equal cash flows that occur periodically such as monthly, quarterly or annually. For example, an investment that gives you fixed monthly payments for a specified period. There are two types of annuities, namely, ordinary annuities and...

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Present Value of a Single Cash Flow

Present value of a single cash flow refers to how much a single cash flow in the future will be worth today. The present value is calculated by discounting the future cash flow for the given time period at a specified discount rate. The formula for calculating present...

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Future Value of a Single Cash Flow

Future value of a single cash flow refers to how much a single cash flow today would grow to over a period of time if put in an investment that pays compound interest. The formula for calculating future value is: Example Calculate the future value (FV) of an...

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Time Value of Money for Different Compounding Frequencies

Let’s first review the time value money concept using a very simple example. Example 1 Let’s say you have $2,000 to invest. You decide to invest it for 3 years in an account that pays you an interest of 6% per annum. How much will your investment grow to in 3 years?...

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Effective Annual Yield

When you go to a bank inquiring about the deposit rates, the rates specified by the bank can be expressed in two ways: nominal interest rate and the effective annual rate (also called effective annual yield). The difference between the two is that the nominal rate...

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Interest Rate Equation

The required interest rate that an investor earns from an investment is made up of various components. The general interest rate equation is expressed below: The nominal risk-free rate itself is expressed as the sum of real-risk free rate and inflation premium.­­ It...

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Interest Rates

Interest rates are how we measure the time value of money. While making an investment, an investor will need to know the interest rate that the investment will earn. The interest rates can be interpreted in many ways. Required Rate of Return Required rate of return is...

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Introduction – Time Value of Money

Let’s say that you are given a choice to receive $100 today or $100 one year from now. Which choice will you prefer? The more likely answer is that you will want to receive $100 today. You could purchase something with that $100 today or you could deposit it in a...

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Time Value of Money

This reading provides an introduction to the concepts and techniques of time value of money. These techniques are a fundamental tool for financial analysis, corporate finance, valuation, and other investment decisions.

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