# Chapter 3 Time Value of Money

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## Simple Interest Example

• SI = P0(i)(n) = \$1,000(0.07)(2) = \$140
• Assume that you deposit \$1,000 in an account earning 7% simple interest for 2 years. What is the accumulated interest at the end of the 2nd year?

## Simple Interest (FV)

• What is the Future Value (FV) of the deposit?

## Simple Interest (PV)

• The Present Value is simply the \$1,000 you originally deposited. That is the value today!
• Present Value is the current value of a future amount of money, or a series of payments, evaluated at a given interest rate.
• What is the Present Value (PV) of the previous problem?

## Why Compound Interest?

• Future Value (U.S. Dollars)

## Future Value Single Deposit (Graphic)

• Assume that you deposit \$1,000 at a compound interest rate of 7% for 2 years.
• 0 1 2
• \$1,000
• FV2
• 7%

## Future Value Single Deposit (Formula)

• FV1 = P0 (1 + i)1 = \$1,000 (1.07) = \$1,070
• Compound Interest
• You earned \$70 interest on your \$1,000 deposit over the first year.
• This is the same amount of interest you would earn under simple interest.

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