Foundations and Applications of the Time Value of Money

Overview

Understanding financial transactions—whether involvinginvesting, borrowing, or lending—requires an understanding ofthe time value of money (TVM), as well as the financial mathematicsthat go along with it. And while TVM is an essential aspect offinance, there aren't many resources that take the time to fullyexplain it.

In this book, the experienced author team of Pamela PetersonDrake and Frank Fabozzi fully expand upon the type of TVM conceptsusually presented as part of an ...

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Overview

Understanding financial transactions—whether involvinginvesting, borrowing, or lending—requires an understanding ofthe time value of money (TVM), as well as the financial mathematicsthat go along with it. And while TVM is an essential aspect offinance, there aren't many resources that take the time to fullyexplain it.

In this book, the experienced author team of Pamela PetersonDrake and Frank Fabozzi fully expand upon the type of TVM conceptsusually presented as part of an overview given in other generalfinance books. Throughout these pages, various TVM concepts andprinciples are discussed, with the authors offering examples ineach chapter to reinforce the tools and techniques covered.Problems and detailed solutions—demonstrated using twodifferent financial calculators, as well as Excel—are alsoprovided at the end of each chapter, while glossary terms areincluded in an appendix, to familiarize you with basic terms.

Divided into two comprehensive parts—The Basics of the TimeValue of Money and A Few Applications—this comprehensive guidecan help you analyze almost any financial transaction and evaluatecash flows to determine values at different points in time orreturns on investments. Written with both the aspiring andexperienced financial professional in mind, Foundations andApplications of the Time Value of Money:

  • Deals with the compounding and discounting of lumpsums—translating single values through time
  • Shows how valuing series of cash flows is a simple extension ofdiscounting or compounding lump sums
  • Demonstrates how to calculate the annual percentage rate, theeffective annual rate, and the internal rate of return forfinancial transactions
  • Looks at loans and how they may be amortized
  • Focuses on deferred annuities—which are typically usedwithin the retirement arena—and other"saving-for-future-spending" scenarios in which there is more thanone withdrawal of funds in the future
  • Addresses the valuation of stocks and bonds using TVMmathematics

Rounding out this detailed discussion, Peterson Drake andFabozzi examine the applications of the TVM mathematics with regardto: evaluating whether to get an MBA, deciding whether to lease orbuy a car, and whether gold is a good investment. And while this isnot a personal finance book, the authors chose examples that mightinterest you in immediately applying the techniques outlinedhere.

Making more informed financial decisions relies on a firm graspof the time value of money. This book has the insights and adviceneeded to achieve such a goal.

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Product Details

  • ISBN-13: 9780470407363
  • Publisher: Wiley
  • Publication date: 9/8/2009
  • Series: Frank J. Fabozzi Series, #179
  • Edition number: 1
  • Pages: 298
  • Sales rank: 812,151
  • Product dimensions: 6.30 (w) x 9.10 (h) x 1.20 (d)

Meet the Author

PAMELA PETERSON DRAKE, PhD, CFA, is the J. Gray FergusonProfessor of Finance and Department Head of Finance and BusinessLaw at James Madison University. Prior to joining James MadisonUniversity, she was an associate dean and professor of finance atFlorida Atlantic University, and, previous to that, a professor atFlorida State University.

FRANK J. FABOZZI, PhD, CFA, CPA, is Professor in the Practice ofFinance and Becton Fellow at the Yale School of Management, Editorof the Journal of Portfolio Management, and Associate Editor of theJournal of Structured Finance and the Journal of Fixed Income.

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Table of Contents

Preface.

About The Authors.

Introduction.

Part 1: The Basics Of The Time Value Of Money.

Chapter 1: The Value Of Compounding.

Compounding.

Calculator And Spreadsheet Solutions.

Frequency Of Compounding.

Chapter 2: Don't Discount Discounting.

Discounting.

Discounting More Than On Future Value.

Determining The Number Of Compounding Periods.

Chapter 3: Cash Happens.

Valuing A Stream Of Future Cash Flows.

Valuing A Perpetuity.

Annuities.

Chapter 4: Yielding For Yields.

Annualized Rates Of Interest.

Determining The Unknown Interest Rate.

Rules.

Part 2: A Few Applications.

Chapter 5: Loans: To Amortize Or Not To Amortize.

Amortizing A Loan.

Interest Rates On Loans.

Determining The Number Of Periods.

Variations On The Theme.

Chapter 6: Saving To Spend.

Valuing A Deferred Annuity.

Annuities With Annuities.

A Bit Of Realism.

Chapter 7: Values Tied To Bonds.

Bond Basics.

Calculating The Yield To Maturity.

Issues.

Chapter 8: Taking Stock.

What's In A Value? The Basics Of Stock Valuation.

Returns On Stocks.

Chapter 9: A Capital Idea.

The Net Present Value.

The Profitability Index.

The Internal Rate Of Return.

Chapter 10: Fact Or Fiction.

Fact Or Fiction: It Pays To Get An MBA.

Fact Or Fiction: Leasing A Car Accosts Less Than Buying ACar.

Fact Or Fiction: Gold Has Always Been A Good Investment.

Appendices.

Appendix A: Using Financial Calculators.

Preparing The Calculator.

The Basics.

Financial Functions.

Tips.

Troubleshooting.

Appendix B: Using Spreadsheets For Financial Calculations.

The Basics.

Time Value Of Money Functions.

Cash Flow Functions.

Other Useful Functions For Financial Mathematics.

Appendix C: Formulas.

Appendix D: Glossary.

Appendix E: Solutions To End-Of-Chapter Problems.

Index.

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