Lecture notes Behavioural Finance (6021FIN)

The Time Value of
Money
3-1

,Learning Objectives
At the end of this session you should be able to:
▪ Understand the concept of the time value of money
▪ Differentiate between types of interest rate
▪ Be able to calculate a Future Value (FV) and Present
Value (PV)
▪ Understand and be able to use financial tables
▪ Calculate the present values of multiple cash flows,
annuities and perpetuities
▪ Cope with non-standard annuities and perpetuities
▪ Distinguish between real and nominal cash flows and
interest rates 3-2

,Future and Present Values
❑Capital markets allow for the movement of money
over time

❑Several ways to receive money in the future
• A one off payment e.g. inheritance, lottery win
• A regular stream of payments e.g. salary, interest

▪ The Future Value (FV) is the actual amount you
get, that is the number of pounds you receive in
your hand, at the future date – i.e. the cash flow

▪ This differs from the Present Value (PV) which is
3-3
what that future cash flow is worth TODAY

, Indifference

Receive Receive money
money in the future
today

Present Value Future Value
PV FV



3-4