Introduction to Finance: Markets, Investments, and Financial Management, Fourteenth Edition

Chapter 9. Time Value of Money

Chapter Learning Objectives:

AFTER STUDYING THIS CHAPTER YOU SHOULD BE ABLE TO:

• Explain what is meant by "the time value of money."

• Describe the concept of simple interest and the process of compounding.

• Describe discounting to determine present values.

• Find interest rates and time requirements for problems involving compounding or discounting.

• Describe the meaning of an ordinary annuity.

• Find interest rates and time requirements for problems involving annuities.

• Calculate annual annuity payments.

• Make compounding and discounting calculations using time intervals that are less than one year.

• Describe the difference between the annual percentage rate and the effective annual rate.

• Describe the meaning of an annuity due (in the Learning Extension).

Where We Have Been. . .

In Chapter 8, you learned how interest rates are determined in the financial markets. The supply of and demand for loanable funds were discussed along with the determinants of market or "nominal" interest rates. You should recall that the determinants are the real rate of interest, an inflation premium, and a default risk premium for risky debt. A maturity risk premium adjusts for differences in lives or maturities, and there also may be a liquidity premium. You also learned about the characteristics of U.S. government debt securities and the term or maturity structure of interest rates. You now should know how inflation premiums and price movements affect interest rates, as well as why default ...