Explain the time value of money concept. What is meant by the effective interest rate. How are time value of money concepts applied to accounting applications in determining the present value of expected cash flows and in valuing bonds?
Time Value of Money concept is that money available at the present time is more worth than the identical sum in the future due to its potential earning capacity.
Effective interest rate does take the compounding period into account and thus is more accurate measure of interest charges.
In which the amount of money today is worth than the same amount in the future.
In which it determines the fair price of a bond.the value of a bond is determined by discounting the bond's expected cash flow to the present using the appropriate discount rate.
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