Question

1. What is the relationship between present value and future value?

2. Why is compounding on a monthly basis better than compounding on an annual basis?

3. How do we determine the appropriate discount rate to use when finding present value?

4. What do we mean when we refer to an annuity? What is the difference between an annuity and an annuity due?

Answer 1

Ans.1. Present value determine the time value of money in current date, on the other hand, future value determine the value of money in future date. Both are related to each other, as they depends on each other.

Ans.2. Compounding on a monthly basis better than compounding on an annual basis because on monthly basis, it provide more returns than annual basis. In computation of compounding, rate is related to time, in monthly basis, it computes

Ans.3. There is a formula which helps us to determine the appropriate discount rate to use when finding present value:

Present Value = An/ (1+ R)n

An = Amount

R = Rate

N = Number of times.

Ans.4. Annuity = Annuity is defined as a continous periodic cash flows for a specified period of time.

The major difference between annuity and annuity due. Annuity due is defined as payments is due for a specific period of time. Annuity means continous periodic cash flows for a specific period of time.