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Wize University Introduction to Finance Textbook > Time Value of Money

Introduction to TVM

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What is Time Value of Money?

  • The relationship between money, time and interest rates.
  • Interest rates cause the value of money to change over time.

Real Life Applications of TVM

  • Loans and mortgages
  • Savings
  • Credit cards
  • Stocks and bonds
  • Car leases

The Financial Calculator

Most TVM operations can be performed on a financial calculator, replacing the need to use some complicated formulae.

Please use the Texas Instrument BA-II Plus Calculator as it is the most widely used calculator and contains the most easy to use features.

Setting Up Your Calculator

Step 1: Set the decimal places to 9

Step 2: Restore default setting for P/Y and C/Y
When doing this you should see P/Y = 1 and if you press the up or down arrow you should also see C/Y = 1.

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Entering the TVM Variables

  • First enter the value
  • Then press the variable you wish to assign it to.
  • For example: To enter the present value as $1,000:
  • Step 1: Enter 1,000
  • Step 2: Press the [PV] button

Wize Tip
On the financial calculator, always enter rates in percentage format. For example, if you wish to enter a rate of 5.1%, simply enter 5.1.

Computing a TVM Variable
  • First enter the TVM variables you have
  • Then press [CPT] followed by the TVM variable you wish to compute.
  • For example: To compute the future value:
  • Step 1: Enter the TVM variables you have
  • Step 2: Press the [CPT] button followed by the [FV] button.
Extra Practice
Paul will receive $100 per year starting one year from today, the payments will continue until the end of year 5. This cash stream can be described as which of the following (select all that apply)?
Which of the following will increase the future value of an investment, but decrease the present value?
Which of the following best describes this cash flow:
You will receive a payment of $1,000 in one year and 5% more each year thereafter.
Which of the following best describes this cash flow:
You just deposited $5,000 into a savings account and will return to it in 10 years without making any additional deposits. How much will you have in 10 years?
Which of the following best describes this cash flow:
You will receive $100 next year and $50 more each year there after for a total of 20 years.
Which of the following best describes this cash flow:
You will receive $100 next year and 5% more each year thereafter for a total of 20 years.
Which of the following best describes this cash flow:
You just won a lottery that will pay you $5,000 at the beginning of each year starting today.
Which of the following best describes this cash flow:
Mike just borrowed $100,000 and must repay it in equal monthly instalments. His first payment is due one month from today.
Which of the following best describes this cash flow:
Cyrus is expected to start paying for his daughter's tuition 18 years from today and it is expected to cost $10,000 per year for 5 years.

Karla inherited $30,000 and can choose between the following 4 savings accounts:
What is Karla's opportunity cost?