Running head: Time Value of Money: Simple Interest verses Compound Interest

Time Value of Money: Simple Interest versus Compound Interest

Time Value of Money: Simple Interest versus Compound Interest

Dewanna Johnson

Liberty University

**Outline**

I. Applications of Time Value of Money

1.1 Example One

1.2 Example Two

2. Interest

2.1 What is Interest?

2.2 Three Variables of Interest

1. Principal

2. Interest Rate

3. Time

2.3 Why is Interest Charged?

3. Simple Interest

3.1 What is Simple Interest?

3.2 Simple Interest Formula

4. Compound Interest

4.1 What is Compound Interest?

4.2 Compound Interest Formula

5. Compound Interest Tables

1. Future Value of $1

2. Present Value of $1

3. Present Value of an Ordinary Annuity of $1

4. Present Value of an Annuity due

5. Present Value of a Deferred Annuity

6. Conclusion

7. References

**Abstract**

The time value of money (TVM) is based on the principle that "a dollar today is worth more than a dollar in the future, (Mott, 2010, pp.31).

Waiting for future dollars involves a cost -the cost is foregoing the opportunity to earn a rate of return on money while you are waiting" (pp.31). TVM was developed by Leonard Fibonnacci in 1202 and is one of the basic concepts of finance. One hundred dollars today has a different buying power than it will have in the future. For example, $100 invested in a savings account at your local bank yielding 6% annually will grow to $106 in one year. The difference between the $100 invested now-the present value of the investment-and its $106 future value represents the time value of money, (Spiceland, Sepe, Nelson, pp. 322).

Time Value of Money: Simple Interest versus Compound Interest

The time value of money is an accounting concept used for making decisions about Notes, Leases,