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In: Finance

Define these business finance terms in your own words and then give a real world example...

Define these business finance terms in your own words and then give a real world example of each: Compounding vs. Discounting, Discounted Cash Flow Valuation, Time Value of Money, (Ordinary) Annuity vs. Annuity Due, Amortized Loans.

Solutions

Expert Solution

1. Compounding means that it is related to compounding of the present value of the cash flows at the future.

Discounting is related to discounting of the future cash flows at the present value.

compounding is generally related to calculation of future value whereas discounting is related to calculation of present value.

For example we apply discounting in calculation of present value of annuity.

2. discounted cash flow valuation is a valuation technique in which future cash flows will be discounted at the present value in order to derive the value of the company.

for example discounted cash flow valuation of Reliance can be done in order to find intrinsic value

3. Time value of money is a concept in finance which advocates that similar amount of money today will be having a higher worth than a similar amount of money tomorrow because there will be a factor of inflation which diminish the value of money

For Example, Time value of money is related to investment decisions

4. Annuity due means receiving the cash flows at the beginning of the year whereas ordinary annuity means that receiving the stream of cash flows at the end of the year

For example systematic investment plan is an example of ordinary annuity.

5. Amortized loan are all such loans in which loan are divided in installment which will include the portion of both principle and investment.

Home loans are example of amateurs loans which will include installment in proportion of principal and interest.


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