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MBA Finance- time_value_of_money

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Learning Objectives: 6 - 1
After reading this chapter, students should be able to:
Convert time value of money (TVM) problems from words to time lines.
Explain the relationship between compounding and discounting, between future
and present value.
Calculate the future value of some beginning amount, and find the present
value of a single payment to be received in the future.
Solve for time or interest rate, given the other three variables in the TVM
equation.
Find the future value of a series of equal, periodic payments (an annuity)
as well as the present value of such an annuity.
Explain the difference between an ordinary annuity and an annuity due, and
calculate the difference in their values.
Calculate the value of a perpetuity.
Demonstrate how to find the present and future values of an uneven series
of cash flows.
Distinguish among the following interest rates: Nominal (or Quoted) rate,
Periodic rate, and Effective (or Equivalent) Annual Rate; and properly
choose between securities with different compounding periods.
Solve time value of money problems that involve fractional time periods.
Construct loan amortization schedules for both fully-amortized and
partially-amortized loans.
Chapter 6
Time Value of Money
LEARNING OBJECTIVES

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Lecture Suggestions: 6 - 2
We regard Chapter 6 as the most important chapter in the book, so we spend a good
bit of time on it. We approach time value in three ways. First, we try to get
students to understand the basic concepts by use of time lines and simple logic.
Second, we explain how the basic formulas follow the logic set forth in the time
lines. Third, we show how financial calculators and spreadsheets can be used to
solve various time value problems in an efficient manner. Once we have been
through the basics, we have students work problems and become proficient with the
calculations and also get an idea about the sensitivity of output, such as present
or future value, to changes in input variables, such as the interest rate or number
of payments.
Some instructors prefer to take a strictly analytical approach and have
students focus on the formulas themselves. Others prefer to use the Present Value
Tables, which have for many years been supplied with the text. In both cases, the
argument is made that students treat their calculators as “black boxes,” and that
they do not understand where their answers are coming from or what they mean. We
disagree. We think that our approach shows students the logic behind the
calculations as well as alternative approaches, and because calculators are so
efficient, students can actually see the significance of what they are doing better
if they use a calculator. We also think it is important to teach students how to
use the type of technology (calculators and spreadsheets) they must use when they
venture into the real world.
In the past, the biggest stumbling block to many of our students has been
time value, and the biggest problem there has been that they did not know how to
use their calculator when we got into time value. Therefore, we strongly encourage
students to get a calculator early, learn to use it, and bring it to class so they
can work problems with us as we go through the lectures. Our urging, plus the
fact that we can now provide relatively brief, course-specific manuals for the
leading calculators, has reduced if not eliminated the problem.
Our research suggests that the best calculator for the money for most
students is the HP-10B. Finance and accounting majors might be better off with a
more powerful calculator, such as the HP-17B. We recommend these two for people
who do not already have a calculator, but we tell them that any financial calculator
that has an IRR function will do.
We also tell students that it is essential that they work lots of problems,
including the end-of-chapter problems. We emphasize that this chapter is critical,
so they should invest the time now to get the material down. We stress that they
simply cannot do well with the material that follows without having this material
down cold. Cost of capital and capital budgeting make little sense, and one
certainly cannot work problems in these areas, without understanding time value
of money first.
For other suggestions about the lecture, please see the “Lecture
Suggestions” in Chapter 2, where we describe how we conduct our classes.
DAYS ON CHAPTER: 4 OF 58 DAYS (50-minute periods)
LECTURE SUGGESTIONS

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 After reading this chapter, students should be able to: Convert time value of money (TVM) problems from words to time lines. Explain the relationship between compounding and discounting, between future and present value. Calculate the future value of some beginning amount, and find the present value of a single payment to be received in the future. Solve for time or interest rate, given the other three variables in the TVM equation. Find the future value of a series of equal, periodic payments (an annuity) as well as the present value of such an annuity. Explain the difference between an ordinary annuity and an annuity due, and calculate the difference in their values. Calculate the value of a perpetuity. Demonstrate how to find the present and future values of an uneven series of cash flows. Distinguish among the following interest rates: Nominal (or Quoted) rate, Periodic rate, and Effective (or Equivalent) Annual Rate; and properly choose between securities with different compounding periods. Solve time value of money problems that involve fractional time periods. Construct loan amortization schedules for both fully-amortized and partially-amortized loans. We regard Chapter 6 as the most important chapter in the book, so we spend a good bit of time on it. We approach time value in three ways. First, we try to get students to understand the basic concepts by use of time lines and simple logic. Second, we explain how the basic formulas follow the log ...
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