Time Value of Money
Chapters in this video
- 0:00 Why a dollar today beats a dollar tomorrow
- 1:24 Future value formula and compounding engine
- 2:53 Rule of 72 approximation trap
- 3:38 Present value and the time direction trap
- 4:45 Net present value worked example
- 6:17 Internal rate of return and bond YTM link
- 7:22 NPV vs IRR conflict: why NPV always wins
- 8:34 Rapid-fire exam recap
What this video covers
- Why a dollar today is worth more than a dollar tomorrow, and how the discount rate (required rate of return) converts future cash flows into present value
- How future value (FV) uses compounding, and the trap that the Rule of 72 is an approximation, not an exact calculation
- Why more time increases future value but decreases present value, since discounting is the mirror image of compounding
- What net present value (NPV) measures: present value of future cash inflows minus initial cost, and the decision rules at positive, negative, and zero NPV
- Why zero NPV does not mean zero profit; it means the investment earns exactly the discount rate used
- What internal rate of return (IRR) is: the discount rate that drives NPV to zero, and why IRR equals yield to maturity (YTM) for bonds
- Why NPV wins when NPV and IRR conflict on mutually exclusive projects, since IRR assumes unrealistic reinvestment rates
Read the full lesson, free
This video's complete written lesson is free to read in the CertFuel app, no signup wall. The complete Series 65 course also includes adaptive practice questions and spaced-repetition flashcards, free through December 31, 2026.