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Using a Timeline to Solve Time Value of Money Problems

CFA® Exam Level 1, Financial Mathematics

Time Value of Money (CFA L1) Using a Timeline to Solve Time Value of Money Problems

When solving a time value of money problem, it is sometimes easy to draw a timeline to present the cash flows on it. Once we have the timeline, we can easily understand the variables and visualize the present value or future value calculations.

In the previous pages, we demonstrated the time line for an ordinary annuity and for uneven cash flows.

Let’s take one more example to demonstrate the use of a time line.

Example: Loan Payments

You have taken a loan of $10,000 at an annual interest rate of 12% for a period of 2 years. Calculate the monthly payments you will make on this loan.

The payments (PMT) or Equated Monthly Instalments will be paid monthly for the next 24 months.

The above problem can be demonstrated on a timeline as follows:

timeline

Calculator Usage
To calculate the monthly payment:

Set compounding frequency to 12 (P/Y)

PV = 10,000

I/Y = 12

N = 24

PMT = 470.735

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In this Course

Course Home
Introduction – Time Value of Money
Interest Rates
Interest Rate Equation
Nominal Interest Rate and Effective Yield
Time Value of Money for Different Compounding Frequencies
Future Value of a Single Cash Flow
Present Value of a Single Cash Flow
Future Value and Present Value of Ordinary Annuity
Present Value and Future Value of Annuity Due
Present Value of a Perpetuity
Present Value and Future Value of Uneven Cash Flows
Annuities with Different Compounding Frequencies
Using a Timeline to Solve Time Value of Money Problems
Time Value of Money Quiz 1 ( Reading 6, CFA Level I)
Return to Time Value of Money (CFA L1)

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