Question

Time Value of Money, Bonds Risk and Valuation

a) Provide a detailed description of the topic.
(b) Provide two examples of how the selected concept is applied.
(c) Discuss the challenges faced with the concept selected. As part of this discussion, how will the selected item be implemented/Used in an organization and its significance?
(d) Discuss how the selected concept will change 5 years from now. What can the organizational leaders, financial analyst do today to ensure they are prepared for these advancements?
(e) Provide a graph chart or data with sample numbers indicating the topic you selected?

Answer 1

Answer: Time value of Money- This is the very important concept. that says, today's value of dollar will not worth the same after two or four years. Purchasing power of money decreases as the time passes. If you can buy 10 oranges in $5 today but after two years or so, you will be able to buy only 8 oranges or less in $5 so money loses its value in terms of purchasing, as the time passes while money enhances its value if invested because interest or return is added on this. The money that you have now, will have more worth in future if you keep it in bank or invest it into some other financial alternative.

Answer(2): Two main concept of Time value of money-

Present value- It is the present worth of the future sum of money or the cash flow, you will receive in future. If a company or an individual expects to receive a sum of money after 5 years but you want to know the current worth of that money then with the help of discounting factor (inflation rate, interest rate, cost of capital, opportunity cost %) you can calculate the present value of that amount.

Formula- Present Value = Future value / (1+r)n

Where r is the rate of interest and n is number of years.

Future value- This is the future worth of today's amount. If you are investing a sum of money today, you want to know how much will you have after a certain period of time so with the help of inflation or interest rate, you can know the future value of your present dollar.

Future value = Present value * (1+r)n

Answer(3): Challenge in Time value of money concept- It is not possible to estimate the correct inflation and interest rates. Whatever interest rate, we expect, it is not 100% sure. It may vary/change due to change in economic conditions.

Application of Time value of money- This concept is applied in the personal finance of individuals and in the companies. Company that is considering a capital budgeting decision and evaluating a project's worth, it uses time value of money concept, it calculates present value of future expected cash inflows from a project and compares it with the initial cost and if the P.V of future cash flow exceeds, project is approved otherwise rejected.

Answer(4): Time value of money concept is an advanced concept only, this helps in calculating present worth and future value. After five years also this concept will be equally useful and important in personal finance as well as in big projects of companies.