The time value of money- a dollar today Is worth more than a dollar received a year from now. This concept illustrates what economists call an opportunity cost of passing up the earning potential of a dollar today. This opportunity cost is the time value of money. The understanding of the time value of money is important to understanding financial management. 3.
How would an increase in the interest rate(r) or a decrease in the holding period (n) affect the future value(Fan) of a sum of money? Explain why. An increase in the interest rate would increase the future value of a sum of money. A decrease in the holding period would decrease the future value of a sum of money. 4. Suppose you were considering depositing your savings In one of three banks, all of which pay 5 percent Interest; bank A compounds annually, bank B compounds semiannually, and bank C compounds dally.
Which bank would you choose? Why? I would choose bank C because compounding dally will earn me more money. Each day I will earn 5% interest Instead of each year or twice a year. I will earn the most money with bank C. 5. What is an annuity? Give some examples. Distinguish between annuity and a perpetuity. An annuity is a series of equal dollar payments for a specified number of years. For example, pension payments, insurance obligations and the interest owed on bonds.
