Question

describe present value and future value in detail. Describe an annuity in detail. describe compound interest and simple interest.describe effective annual rate.describe amortization schedule and how principle payments changes over time in this table. you are 22 years old and just landed your first job after college ! explain how yoi should save for retirement ?

needed ASAP

Answer 1

Time value of money is a method to find out the future value and present value of the cash flow. There are two techniques of time value of money i.e (1) Compounding techniques (2) discounting techniques

Present value referes to the value of future cash flow in today's time period by considering the inflation or by discounting the future cash flow at a rate equal to inflation rate. present value refers to the value of future cash flow in today's time after adjusting to inflation.

Future cash flow refers to value of money after a certain period of time. compounding technique of time value of money is used to find out the future value of money. As the value of money declines with the time so to compensate the loss due to decline in the value of money interest is paid on the investment to keep the present value of money intact in the future.

Annuity refers to a series of same cash flows (cash inflow or outflow) over a period of time. In case of annuity the sam amount either paid or received over a fixed period of time. there may be two types of annuity (1) ordinary annuity - in which amount is paid or received at the end of year (2) annuity due- in which same amount is received or paid at the beginning of the year

Compound interest rate refers to rate of return which follow the compounding effect i.e. interest is charged on (Interesst+principal) accumulated wealth. In compound interest interest rate is applicable on interest also.

Simple interest rate refers to interest rate which is applicable to principal only and no compounding is done and no interest is charged on interest earned.

effective interest rate refers to rate of interest which incorporates the compounding effect. it is the Interest rate which consider the interest rate which includes the compounding effects.

Amortizable table refers to the statement which shows the details of details of beginning balance, monthly payment, division of monthly payment into payment toward interest and principal and end balance in mortgage balance after adjusting the principal monthly payment. Principal payments reduces after every monthly or yearly payment as more portion of monthly payment or annual payment would be used for payment of mortgage payment and less amount of monthly payment would be charged against the interest payment.

After Joining a job, start saving money at early stage so it would provide a long tenure period for investment and small amount of saving would create a huge funds at the time of retirement because of compounding effect.