Purchase Solution

Simple and compound interest; present value concept; and TVM.

Not what you're looking for?

Ask Custom Question

1. Can you explain the difference between "simple" and "compound" interest? Please provide some of the uses of compound interest in business.
I also need to know the effects of using compound interest when evaluating future value transactions and calculations.

2. What is "present value"? What is an example of the "present value" concept? How does a single cash flow present value example differ from an annuity calculation?

3. How is a home mortgage an example of TVM? How can you show that more interest is paid at the beginning of a loan period than at the end?

Purchase this Solution

Solution Summary

Your tutorial is 826 words plus two references to give you a clear understanding.

Solution Preview

Simple interest is interest on the principle amount while compound interest is when your principle and any earned interest earned interest. The interest rate is applied to the original principle and any accumulated interest.
Compound interest is critical to investment growth. With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest.

Future Value = Present Value (1+r)^n
r= interest rate
n= time period

Future value of today's Rs 100 @10% per annum after one year will be Rs. 110/-
Thus compounding technique is use to find the future value of the investment

Use of Compounding in business:

1) Future value of Annuity

WE can also use the compounding technique to find out the future value of annuity in the following manner:

What's the future value in 10 years of $1,000 payments received at the beginning of each year for the next 10 years? A 5.625% interest rate is assumed.

Here we have to find out the compounded value of annuity
F=Future value, A= Annuity r= rate of interest n=duration

A= 1000, r= 5.625%, n=10= ...

Purchase this Solution

Free BrainMass Quizzes
Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.