Question

discussion topic :- In a few sentences, please describe the role the time value of money has played in a recent personal or professional financial decision you have made.

first person:-

Personal: I think most of the people in this class have an investment account, so do I. I put some of my paycheck in mutual fund account, it gains more value when I cash out. And also the earning rates are way better than just put in checking accounts.

Professional financial decision： The goal for my job is helping the client make most of their money( Help client get more future value). I met the customer asked me what’s the interest rate for two cash bonuses he got. There are two coupons for bringing new money and keep 90 days: put$75,000 to get $1000, put $250,000 to get $2000. After I calculate, the first interest rate is 5.4%(1000/75000*365/90). The second one is 3.2%(2000/250000*365/90). So put $75K money to earn $1000 is better.

Critically analysis and response to first person :- 120-150 words

Answer 1

Time Value of Money is the criteria used for making financial decision, It helps in understanding the vakue of 1 Currency after a particular period of time and In order to earn 1 Currency after a particular period of time, then investment amount at which point same is to be maintained. It takes into account the interest factor after taking all the risk factors pertainign in the market which hits that funds. / investment at large.

Flashing at the opinion of first person, he is focusing on Investment decision and wants to make more money without hedging the same it means without reducing the risk in the investment market. Ignoring the facts of check account and putting all in fluctuating market is not seems to be wise decision as it may hit the investor at the end with the money he invested or lower than that. Time value of money is totally ignored by the personal individual as same will be taken into account by the Financial institutions while crediting any interest rate to the chekcing account or redemption value of the investment at the end of the period. Here decision is taken simply ignoring the time value of money as well as no risk factors are prevailing in the market and its voliatiliy in the market.

Secondly, Professional Financial decision focusing on the both types of possible capital outflow and which leads to regular earning at particular fixed amount over a time period is mulling exercise. It require complete understanding of market rate as well as the future growth rate and beta ( risk factor) while determining the discountign rate. here both options are evaluated to derive at particular interest rate over a period of time.

From above it can concluded that time value of money is taken into account to determine your desired future earnings, and your investment currently in the market and ofcourse in which market will lead to at least particular amount of fututre earning. Simply investing in any portfolios without understanding the market movements and the interest rate volatility will leads to more risk as well as wrong selection of investment . this may lead to all eggs in one basket as well.