Finance - Time Value of Money (TVM)

Continue from last post, this post will be touch on calculations of TVM. To get the future value of present money value in ‘n’ years later (or vice-versa) with fixed interest rate annually, the calculation is shown as below: 

PV to FV: PV x (1 + i)ⁿ = FV

FV to PV: FV / (1 + i)ⁿ = PV

*i = interest/discount rate, n = year

When PV to FV, we call that rate as interest rate; in inverse way, it is called as discount rate. 

Well, we use the above calculation if only certain assumptions met. What if the money being invested/lend/save/borrow in regularly terms like installment? Let’s look at below annually paid installment calculation (also known as annuity): 

FV of annuity: annual payment x 1 / i ( [1 + i]ⁿ – 1 ) 
PV of annuity: annual payment x 1 / i ( 1 – 1 / [1 + i]ⁿ )

*You may wonder that the annuity calculation is so complicated and how people always calculate in this way? Actually finance people have a calculator designed specific for finance usage only, so we need not calculate by using formula anymore ~ :D .

These are only a few basic calculations for TVM, there will be much more to explore in depth, like different cash flow stream, different rates and else. Here is just to let you have a basic understanding in finance. 

So far for the basic quantitative stuffs, in next post, I will touch on structure of financial market, good day~!