Time value of money, Compounding, Discounting and Annuity

1. PRESENTED BY
SIMRAN KAUR

2. Money has a time, a fixed value
associated with it. It is this we call time
value of money.
Value of money decreases with time.
Today Re.1 is some value less than Re.1
in forthcoming year and greater than Re.1
in previous year. This degradation is
because of the practicality of the concept
of interest is basically two forms: simple
interest and compound interest.

3. Compounding can be defined as keeping a
particular amount at a particular rate of
interest for a particular time period.
It can be simply stated as “Interest on
Interest”.
It will always give incremented value of the
invested money subject to constraints as
recession and inflation

4. The future value of money can be easily calculated
by the formula:-
FV = PV(I+R/T)^(N*T)
Where
FV = future value of the given amount
PV = present value of amount
R = rate of interest at which present amount set to
N = time for which amount is kept under interest
T = type of compounding (annually, semiannually,
quarterly, daily)

5. One can calculate after how many years
money will be doubled if one keeps at a
certain rate of interest and vice-versa
T = 72/R
Where
T = time duration in number of years
R = rate of interest

6.  Compounding requires two things – the re-
investment of earnings and time
 An investment with interest compounded
monthly will grow faster than an interest
compounded annually
 While compounding is beneficial if one is
receiving the interest, if he/she is the one
paying compound interest on a loan or credit
card, then it’s costing him/her a lot of money,
as interest is charged on interest

7. Discounting is used to calculate present
value from the estimated future value.
As per degradation, discounting will be
less than compounding.

8. Discounting can be easily calculated by the formula:-
PV = FV____________-
(1+R/T)^(N*T)
Where
PV = present value to be calculated
FV = future value estimated
R = rate of interest
N = time period of present value being converted to
future value
T = type of interest imposed

9.  For the purposes of investors, interest rates,
impatience and risk necessitate that future costs
and benefits are converted into present value in
order to make them comparable with each other.
 Economists assume that today’s investments and
technical change will produce economic growth.
 High discount rates imply giving low values to
future damages, and thus, betting against the
environment and future generations.
 An important consideration when discounting
future costs and benefits to present value is the
discount rate applied.

10. An annuity is an insurance product that
pays out income, and can be used as part
of a retirement strategy.
Annuities are a popular choice for
investors who want to receive a steady
income stream in retirement.

11.  There are two basic types of annuities: Deferred
and Immediate.
 With a Deferred annuity, money is invested for a
period of time until one is ready to begin taking
withdrawals, typically in retirement.
 If one opt for an Immediate annuity he/she begin to
receive payments soon after he/she make initial
investment.
 The Deferred annuity accumulates money while
the Immediate annuity pays out.
 Deferred annuities can also be converted into
Immediate annuities when the owner wants to start
collecting payments.