Detailed explanation to time value of money

Reference no: EM1327818

Time Value of Money

Time Value of Money is one of the most important concepts in the financial world. The principles of time value analysis have many applications, ranging from setting up schedules for paying off loans to decisions about whether to acquire new equipment for a company. Time value of money is also called discounted cash flow analysis.

Apply the concept of present value to Under Armour, Inc. Suppose Under Armour, Inc is selling a bond that will pay you $2,000 in one year from today. Keep in mind that if Under Armour, Inc has financial difficulties in one year you might not get your full $2,000 back. Given that a dollar one year from now is always worth less than a dollar today, you most certainly would not pay a full $2,000 for this bond.

If you are highly risk averse or strongly prefer having money today to having money tomorrow, then you would pay significantly less than $2,000 for this bond. Higher inflation or high interest rates would also lead you to pay less for the bond. Also, the greater the chance of bankruptcy of your company the less you should be willing to pay for the bond.

Given the concepts of the time value of money :

1) How much would you pay for this bond today? Take into consideration your own personal risk preferences, interest rates, inflation, and the probability your company will not be able to pay you back in one year. Note: no need for any math equations for this part. How much you would personally pay for a $2,000 bond from Under Armour, Inc.

2) Based on your answer to the previous question, what would be your discount rate for this bond? Use the present value formulas.

3) Pick two other companies in the same industry. One should be one that you would pay less for a $2,000 bond than you would from Under Armour, Inc and another one that you would pay more for a $2,000 bond from Under Armour, Inc. Would pay more or less for their bonds.

Reference no: EM1327818

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