The principal of the time value of money is probably the single most important c

Question

The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered applications involves the calculation of a future value The process for converting present values into future values is called knowledge of the values of three of four time-value-of-money variables. Which of the following is not one of these variables? This process requires O The inflation rate indicating the change in average prices O The present value (PV) of the amount invested O The interest rate (I) that could be earned by invested funds The duration of the investment (N) All other things being equal, the numerical difference between a present and a future value corresponds to the amount of interest earned during the deposit or investment period. Each line on the following graph corresponds to an interest rate: 0%, 11%, or 21%. Identify the interest rate that corresponds with each line. VALUE (Dollars) 0 1 23 4 5 6 789 10 TIME (Years)

Explanation / Answer

As per rules I will answer the first 4 sub parts of the question above

1.process of converting present value to future value is called COMPOUNDING

(In calculating future values, we compound the Present value at a given interest rate and time period)

2.The Inflation rate indicating change in average prices

(For calculating Future values, we need to compound the PV. This requires knowledge of original amount invested, rate of interest at which the amount is compounded and the time for which it is invested)

3.A= 21%

B=11%

C=0%

(The value of money will be higher as the interest rate increases. Hence A has a higher rate of interest since it shows maximum value as time increases. B shows a lower increase and C is static since the PV of investment remains constant due to no interest)

4: Simple interest and compound interest

(Interest can be charged in 2 ways-Simple and compound)

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