Lecture 4

Question 1

What is the principle of the Time Value of Money (TVM)?

Answer 1

The principle of TVM is that money available now is worth more than the same amount in the future due to its potential earning capacity.

Question 2

What are the four reasons for the Time Value of Money?

Answer 2

: The four reasons are inflation, risk, personal consumption preference, and investment opportunities

Question 3

: What is compounding in finance?

Answer 3

Compounding is the process where the value of an investment grows as the earnings (interest or capital gains) on the investment earn additional interest over time.

Question 4

What is the formula for calculating the future value of an investment using compounding?

Answer 4

The formula is
F
V
=
P
V
×
(
1
+
r
)
n
FV=PV×(1+r)
n
, where
F
V
FV is the future value,
P
V
PV is the present value,
r
r is the interest rate per period, and
n
n is the number of periods.

Question 5

: Calculate the future value of £100 invested for 2 years at an interest rate of 10% per annum using compounding

Answer 5

. The future value would be
£
100
×
(
1
+
0.10
)
2
=
£
121
£100×(1+0.10)
2
=£121