Question

What is the "time value money" ?. Why is it so important?.

B) Explain the relationship between the discount and compound processes.

C) What is an annuity? Provide examples of annuities and distinguish

between an annuity and a perpetuity.

D) Explain the effect of inflation on the rate of return.

E) Explain the term "term structure of interest rates".

F) What is the meaning of "beta"? How is it used to calculate "k", the

rate of return required by the investor ?.

Answer 1

Solution A

The concept of time value of money is very popular in finance. It states that the value of money differs with the time of its payment or receipt. That means the value of $1 today is not same as the value of $1 to be received in one year. The reason behind this is we can invest $1 today and can get something more than $1 in one year.

Time value of money concept is used in complex financial management decision. It is used in working capital management, investment decisions and financial planning.

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