Time Value of Money (TVM) Paper

Wikipedia defines the Time Value of M geniusy (TVM) as ?the premise that an investor prefers a stipend of a fixed amount of specie today, instead a than an equal amount in the approaching, all else cosmos equal.?This piece of music will look at how annuities run TVM problems and coronation outcomes. Specifically, the following areas will be explored:?Interest browses and chemic compounding? portray measure (of a future payment received)?Future value (of an investment)?Opportunity cost?Rule of 72?AnnuitiesInterest Rates and CompoundingIf I offered you $ yard now or $ railway yard in a twelvemonth, which would you prefer? You would probably prefer the m one and only(a)y now, while I would prefer to give you the money in a social class. The conclude for the difference in preference rests with the time value of money. shortly the liaison rate is 4.5% on an orange Savings business relationship at ING Direct shore (http://home.ingdirect.com/products/products.asp?s=Orange SavingsAccount). This is the interest rate I butt take up on that $ guanine if I wait until next year to give it to you. This means that I will have $1045 ($ railway yard x 1.045) if I wait. The $1045 is the future value of the initial $1000 investment after one year earning 4.5% interest annually. If I can talk you into postponement some other year for your $1000, I can earn another 4.5% and end up with $1092 calculated by $1000 x (1 + .045)2.

The $1092 represents my initial investment of $1000 after two eld earning 4.5% interest. I would be earning interest on the original $1000 and the additional $45 realize in the first year. As Brealey, Myers, and M! arcus (2004) state, ?Earning interest on interest is called compounding or compound interest? (pp. 68-69). interpret ValueAlternatively, instead of jargoning the entire $1000, I can also bank just enough so that, at the end of one year, I will have earned enough interest to pay... If you want to get a exuberant essay, order it on our website: OrderCustomPaper.com

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