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Finance PV, FV, Nominal versus effective rate

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a) Explain why the sign we use for present value or future value variables is important when we use Excel or a financial calculator to solve time value of money problems? Also explain how it work (i.e., tackle the "how" as well as "why).

b) True or False - Nominal versus effective rates. Let's make sure we all understand this concept by indicating whether the question below is true or false. Then support your reasoning.

An investment vehicle that compounds more frequently than once per year will always result in an effective rate that is higher than the nominal rate

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Solution Summary

Your tutorial is 221 words discussing how Excel treats positive and negative amounts and why the comment is true. A sample computation is given.

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a) Explain why the sign we use for present value or future value variables is important when we use Excel or a financial calculator to solve time value of money problems? Also explain how it work (i.e., tackle the "how" as well as "why).

The negative sign signals an "outflow" and a positive sign indicates an "inflow." If you put all amounts in as positive, Excel will think that there is no investment and the amounts are all profits This will give you a very exaggerated (and wrong) computation! ...

Solution provided by:
Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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