Time Value of Money Dr. A Vinay Kumar Assistant Professor Finance and Accounting Group

Concept Time Line FV PV Compounding Discounting

Summary Interest Rates are dependent on Risk factors and current market factors As the interest rates increase future value increases Semi annual, quarterly and daily compounding results in higher future value because, interest earns interest Effective annual rate represents the real return on an annualized basis. As the number of years increase the future value increases at an increasing rate because the after the first interest payment, the interest is compounded on a larger base. The nominal rate is smaller for an account with a semi annual compounding is lower nas interest is paid on interest more often. With the additional the additional interest received the nominal rate can be smaller and still generate the required return.