What is the time value of money

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Question: 1. What is the time value of money? Why is it so important?

2. The processes of discounting and compounding are related. Explain this relationship.

3. How would an increase in the interest rate (r) or a decrease in the holding period (n) affect the future value (FVn) of a sum of money? Explain why.

4. Suppose you are considering taking consumer loan from bank for one year. Usually, for short-term loans, the bank offers 12 percent interest that compounds annually. Your credit application has been viewed by a few banks and two of them replied; Bank ALFA offers you a loan at 12 percent annual rate-interest payment by the end of year, and Bank BETA offers a loan with the same annual interest rate, but interest payment is 3 percent by the end of each quarter. Which loan do you prefer? Why?

Reference no: EM131488038

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