Question

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1. Explain the following terms:

1. Time value of Money
2. Present Value
3. Future Value
4. Annuity
5. Differential annuity

Answer 1

                             TIME VALUE OF MONEY

   This is a concept of greater benefits receiving a sum of money now rather than an identical sum in future.

This is a core principle of finance. this is an important concept for investors. Because a dollar on hand today is worth more than a dollar promised in future.

Example: I f you invest $200 (present value)for 1 year at a 5% interest rate (discount rate) at the end of the year , you would have $ 205 (future value).

                  OBJECTIVES

   1. Calculating the rate of interest

   2. Calculate the future value of interest

   3. Calculate value of installments

   4. Solve the problems of loan

                                              PRESENT VALUE

This is a current value of a future sum of money given a specified rate of return.This concept states that the amount of money today is worth more than the same amount in the future.

Example: If you have promised $ 210 in one year the present value is the current value of that $210 today

Present value is very important to corporate finance in the field of ;

1. Future payoff

2.Risk

3.Discount rate

4.Shareholder value

                                                   FUTURE VALUE

This is a important concept of investors and financial planners which they assumed the future value of a current asset at a future date by assuming the rate of growth. If you want compute the future value you must know the 3 things;

1. Find out the interest rate

2.Number of periods

3.Find the account earn simple interest or compound interest

                                                      ANNUITY

This term is an insurance product . Annuity is a contract between you and the insurance company to make a lum-sum payment. Once this is elapsed these product are spent there will be no future payment , if the annuitant is still alive . The main purpose of an annuity plan is to get a regular income source during your retirement years. And also help the to grow tax deferred.