Question

Class, please discuss how the time value of money affects an annuity or similar investment. (200 words please)

No written answers, typed answers only.

Answer 1

Investment without time value of money would be simply annuity multiplied by number of periods. However due to the discount rate the present value of annuity or future value of annuity increases or decreases based on the required which is more realistic than calculating without it.
The formula of Present value of Annuity is given as PV = Annuity *(1-(1+r)^-n)/r , where n = number of periods and r is required rate and formula for FV of Annuity = Annuity *((1+r)ⁿ-1)/r
The discount rate used is the required rate of investment,or the stated rate of investment. Higher the rate lower the PV and higher the FV. Moreover higher the number of compounding lower is the PV and higher is the FV.
Higher the number of Periods higher is the PV and vice versa. Same is the case with FV.
Higher the value of annuity higher the PV and FV of the investment. This time value of annuity is applicable to many concepts like valuation of bond where the coupons are discounted at discount rate, investment in banks, retirement investment which fixed annuity yearly or monthly.

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