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In our accounting, finance and economic courses we are taught that a dollar available to spend today is worth more than that same dollar if it were available to spend sometime in the future. Present dollars are said to be worth more than future dollars. There are three basic reasons usually given to support this assertion.

A first reason is that immediate gratification is usually more preferable to delayed gratification. I could with that present dollar buy something that gives me pleasure today. If I have to wait to get that dollar sometime in the future, I will have to delay purchasing that thing and so defer the gratification that the desired thing provides me.

A second reason is that most currencies suffer inflation over time. This means the amount of goods and services I can acquire with today’s dollar is usually greater than the amount of goods and services I can acquire with that same dollar any time in the future.

The third reason offered is that if I have a dollar in my pocket today, I can take it out of my pocket and invest it in some financial instrument and create more dollars in the future. If I have to wait to invest that dollar until sometime in the future, I have lost some of those extra dollars I could have accumulated had I begun investing today.

Whatever the rationale for translating present dollars into future dollars and vice versa, we are taught to quantify just how much greater the value of today’s dollar is compared to the future dollar. We use formulas to convert present dollars into future dollars and vice versa.

The key parameter in all these formulas is a percentage rate usually denoted “i” that goes by different names. The “i” usually stands for interest rate. But the same rate is also called a discount rate. Ordinarily when we convert a present sum into a future sum the “i” term is called interest. Usually when we are converting a future sum to a present sum we call “i” a discount rate. Sometimes we refer to the “i” as a rate of return. In this course I use these terms interchangeably. But no matter what name we give it, “i” represents the fundamental conversion variable in all the time value formulas I will discuss in this course.

I recommend reviewing the compound interest page first but there is no need to follow the suggested ordering below after reading that page.

Home » Time Value Of Money Course

The Fundamental Accounting Equation

A Simple Balance Sheet and Income Statement

Debits and Credit Transaction Posting Rules

8b. Another Cash Transaction Posting Example

Accounts Payable and Wage Withholding

Prepaid Expenses and Deferred Revenue

Inventory and Cost of Goods Sold

The Lower of Cost or Market Rule

Financial Statement Preparation

16. The Reliability of Financial Statements

Relative Measures of Economic Performance

View Lectures Michael Sack Elmaleh , CPA, CVA Video: Compound Interest Let’s begin with interest calculations. Let’s suppose you open a savings account, and you deposit $5,000 today. We call this $5,000 the principal or present value (PV). The compounding rate or period defines how frequently the bank will credit your account for interest earned. […]

Read More...View Lectures How Are Interest Rates Determined? Michael Sack Elmaleh , CPA, CVA Video: Where Do Interest Rates Come From? In the previous page I introduced the compound interest formula that can be used to determine how a lump sum present value will accumulate into a specific future value. The amount of the accumulated future […]

Read More...View Lectures Fixed Payment Loans Michael Sack Elmaleh , CPA, CVA Video: Mortgages and Fixed Payment Loans One of the most common uses of time value formulas is the calculation of constant payments on a loan that has a fixed initial balance, fixed interest rate and fixed time of repayment. The fixed payment over time […]

Read More...View Lectures Targeted Savings Michael Sack Elmaleh , CPA, CVA Video: Targeted Savings On this page I introduced this compound interest formula: We start with a principal or present value today and figure out how much we will accumulate sometime in the future assuming a fixed interest rate and a fixed number of compounding periods. […]

Read More...View Lectures Michael Sack Elmaleh , CPA, CVA Video: Retirement Planning In the last page I showed how the annuity due formula allowed us to compute how much money was needed to be set aside monthly in order to reach a targeted future value. The example given was saving for college tuition. While there were […]

Read More...View Lectures Michael Sack Elmaleh , CPA, CVA Video: Bond Prices There are many types of bonds, issued by many types of government and private companies. On this page I am interested in discussing bonds that can be easily bought and sold in securities markets, otherwise known as publicly traded bonds. Time value formulas come […]

Read More...View Lectures Michael Sack Elmaleh , CPA, CVA Video: Capital Budgeting In the previous page we looked at bond pricing. In those cases, we knew with a fair degree of certainty the fixed constant interest payments, the maturity value and the plausible range of interest rates to apply in order to set a price on […]

Read More...View Lectures Discounted Cash Flow Modeling Michael Sack Elmaleh , CPA, CVA Video: Discounted Cash Flow We saw in a previous page that time value formulas can be invoked in setting publicly traded bond prices when prevailing interest rates change from the rates set on the original bond issue. The price of the bond was […]

Read More...View Lectures Michael Sack Elmaleh , CPA, CVA Video: Inflation One fundamental reason for time value conversions is to account for changes in the purchasing power of money. When the purchasing power of the dollar goes down over time this is called inflation. When the purchasing power goes up this is called deflation. Historically inflation […]

Read More...View Lectures Michael Sack Elmaleh , CPA, CVA Video: Delayed Gratification and Time Values In one sense the value of one dollar today is certainly greater than one dollar in the future precisely because you can buy something you really enjoy now as opposed to putting off the purchase until sometime in the future and […]

Read More...View Lectures Insuring The Correct Results Michael Sack Elmaleh , CPA, CVA Video: Avoiding Time Value Errors Every time value formula I have introduced in this video series contains this expression or one very much like it: Suppose the interest or discount rate “i” is 5% and the compounding periods, ”n”, equals 8. The above […]

Read More...View Lectures The previous pages have outlined several applications for time value formulas. However not all applications are equally useful. Time value formulas are most useful when there is very little uncertainty about the future cash flows and the appropriate interest or discount rate. This would be the case when figuring out the fixed installment […]

Read More...View Lectures Summary Of Useful Time Value Formulas Formula for Converting One Future Payment to Present Value: Future Accumulated Value of Regular Savings Deposits Formula for Required Regular Investment Deposits to Achieve a Targeted Future Value Click Here to Order the Ebook Bond Price Formula Alternative Bond Price Formula: Perpetuity Formula Get the job you […]

Read More...View Lectures Actuaries: Professionals skilled in quantifying risks associated with mortality, disease, property loss. Adjustable-rate mortgages: mortgages that allow interest rates to change after an initial fixed interest period. Amortization: the reduction of a loan balance to zero. Annuity: a series of payments usually monthly and usually terminating on the death of the recipient. Arbitrage: […]

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