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How would you explain the use of time value of money

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How would you explain the use of time value of money (TVM) in business? What considerations are made when calculating TVM? How can you use TVM to create your own, or someone else's, retirement plan?

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Time preference for money is an individual's preference for possession of a given amount of money now, rather than the same amount at some future time.

Three reasons may be attributed to the individual's time preference for money:
- Risk
- Preference for consumption
- Investment opportunities

What considerations are made when calculating TVM?
Two most common methods of adjusting cash flows for time value of money:
Compounding: the process of calculating future values of cash flows and
Discounting: the process of calculating present values of cash flows.

How would you explain the use of TVM in business?
Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.

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 ...

Solution Summary

This response explains the concept of time value of money in business and the way to calculate it.

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What are the uses of money and how do banks create money?

Week 3: Discussion Questions

1 What are the uses of money and how do banks create money?
2. Is monetary policy conducted independently in the US and is the intended effect always achieved? Why or why not?
3. What is the difference between contractionary and expansionary monetary policy? What are the pros and cons of using expansionary and contractionary monetary policy tools under the following scenarios; depression, recession, and robust economic growth? Which do you think is more appropriate today?
4. What happens to the money supply, interest rates, and the economy in general if the Federal Reserve is a net seller of government bonds? Then describe what happens to the money supply, interest rates, and the economy in general if the Federal Reserve is a net buyer of government bonds. How do these policies impact the firm or industry you work in?
5. What are the advantages and disadvantages of adjustable-rate versus fixed-rate mortgages? Identify the conditions that should exist that make adjustable and fixed-rate mortgages favorable to lenders and borrowers. Which would you suggest for a homebuyer at this time? Explain.
6. In the early 1990s, Argentina stopped increasing the money supply and fixed the exchange rate of the Argentine austral at 10,000 to the dollar. It then renamed the Argentine currency the "peso" and cut off four zeros so that one peso equaled one dollar. Inflation slowed substantially. After this was done, the following observations were made. Explain why these observations did not surprise economists.
1. The golf courses were far less crowded.
2. The price of goods in dollar-equivalent pesos in Buenos Aires, the capital of the country, was significantly above that in New York City.
3. Consumer prices-primarily services-rose relative to other goods.
4. Luxury auto dealers were shutting down.

7. Explain how Franklin D. Roosevelt's statement "We have nothing to fear but fear itself" pertains to macroeconomic policy.
8. How do automatic stabilizers work? How can they slow an economic recovery?

9. The Fed wants to increase the money supply (which is currently 4,000) by 200. The money multiplier is 3 and people hold no cash. For each 1 percentage point the discount rate falls, banks borrow an additional 20. Explain how the Fed can achieve its goals using the following tools:
a. Change the reserve requirement.
2. Change the discount rate.
3. Use open market operations.

10. Suppose the price of a one-year 10 percent coupon bond with a $100 face value is $98.
1. Are market interest rates likely to be above or below 10 percent? Explain.
2. What is the bond's yield or return?
3. If market interest rates fell, what would happen to the price of the bond?

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