USNA Finance - Time Value of Money

THE TIME VALUE OF MONEY

This is a review of fundamental financial concepts and definitions for business students.

The series of videos and practice sessions is intended to provide Accounting students a review of topics covered in introductory finance courses.

Application:

Intermediate Accounting I students must be proficient with the content in videos 1-4, with the exeption of 3C (market yields & prices are not pertinent in this class). Focus should be given to 2B, 3B, & 4B.

Intermediate Accounting II students must be proficient with the content in videos 1-7. Focus should be given to 5 & 7 (7 will also be covered in class due to complexity).

Financial Statement Analysis students must be proficient with the content in videos 8-10. A review of the concepts in videos 1-3 is also advisable.

Video 1: The Time Value of Money

Definition of Principal & Interest, Simple & Compounding Interest. Also, CAGR and discussion of inflation.

Video 2: Debt Concepts & Definitions

A) Debt Instruments: Conceptual explanation of discount paper & notes, interest-bearing notes, annuities, bonds, and amortized debt. Basic factors that drive interest and interest rates, including inflation, risk, and opportunity.

B) Accrual of interest: Breakdown of the inter-period linear (simple) accrual of interest; and the multi-period geometric (compounding) of interest.

Video 3: Principal Debt & Calculator Tutorial

A) Standardization of financial calculator usage and communication

B) Valuation of discount paper & notes, and interest-bearing notes as financial instruments- where only the stated interest rate applies;

C) Valuation of interest-bearing notes as financial securities- where the principal and stated interest rate are traded (on the secondary market) and valued in reference to their price and yield-to-maturity.

Video 4: Annuities & Periodic Adjustments

A) Valuation of annuities and introduction to financial instruments with multiple periods per year;

B) Beginning and ending period computations.

Video 5: Bonds

A) Conceptual details of a Bond and its valuation on primary markets (at issuance only)

B) Discussion of proportionality between stated interest rates and market yields: discount, par, and premium.

Video 6: Money Market Securities

A) Market valuation of discount paper.

B) Introduction of money market yields and straight yields, and further adjustments for the measurement of days in a year.

Video 7: Capital Market Securities

A) Bond secondary market terminology and concepts.

B) Bond spreadsheet of a financial calculator and use of excel models for invoice pricing.

Video 8: Discounted Cash Flow Concepts

A) The application of the time value of money to a series of cash flows over time, and the conceptual understanding of discounting future cash flows.

B) Conceptual derivation of Net Present Value (NPV) and Internal Rate of Return (IRR) of a series of future cash flows.

Video 9: Discounted Cash Flow Computations

Demonstration of the valuation of future cash flows using a financial calculator, including NPV & IRR computations.

Video 10: The Cost of Capital

A) Conceptual overview of the basic financial process of deriving all of the components of a company's cost of capital;

B) Using CAPM to determine the cost of equity, and financial statements to determine the weight of debt and equity;

C) Applying the cost of capital to investment decisions.

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