Question

In Paragraph Forum

1. Explain what calculating the time value of money does.

2. What is the difference between effective rate and stated rate?

3. Explain the relationship between inflation and the time value of money.

4. Please write out the steps in excel to calculate present value and future value.

Answer 1

Time value of money helps in calculating the present value of future investment and future value of current investment so that we can make a decision to find out the present worth and future worth of investment.

2- stated rate of interest is also called quoted rate of interest which is offered on fixed income securities while effective rate of interest is the rate which consider the compounding effect into rate of return, or its the effective rate of return which you are getting taking into account, compounding effect.

3- inflation is the economic situation in which value of money decreases and time value of money concept is used to calculate the rate at which value of money is decreasing.

4- Present value is used by Using present value function in MS excel using the following function command =pv(rate,nper,pmt,fv,type)

Future value is used by Using Future value function in MS excel using the following function command =fv(rate,nper,pmt,pv,type)