134 Finance app
Time value of money (TVM)
Time Value of Money (TVM) calculations, as the name
implies, make use of the notion that a dollar today will be
worth more than a dollar sometime in the future. A dollar
today can be invested at a certain interest rate and
generate a return that the same dollar in the future cannot.
This TVM principal underlies the notion of interest rates,
compound interest and rates of return. There are seven
TVM variables:
Variable Description
N The total number of compounding periods
or payments.
I%YR The nominal annual interest rate (or
investment rate). This rate is divided by
the number of payments per year (P/YR)
to compute the nominal interest rate per
compounding period -- which is the
interest rate actually used in TVM
calculations.
PV The present value of the initial cash flow.
To a lender or borrower, PV is the amount
of the loan; to an investor, PV is the initial
investment. PV always occurs at the
beginning of the first period.
P/YR The number of payments made in a year.
PMT The periodic payment amount. The
payments are the same amount each
period and the TVM calculation assumes
that no payments are skipped. Payments
can occur at the beginning or the end of
each compounding period -- an option
you control by un-checking or checking
the End option.
C/YR The number of compounding periods in a
year.
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