The Right Frame of Time In Finance

The Right Frame of Time In Finance
The Right Frame of Time In Finance
1. Time value of money Explain why this concept is so important in business.
What are the potential pitfalls you may encounter if you fail to correctly
account for the time value of money?
2. Simple versus compound interest Briefly discuss the differences between
simple and compound interest. How do these differences affect both the present
and future values of cash flows?
3. Compounding versus discounting What is the difference between
compounding cash flows and discounting cash flows? Give an example of
when you would use each.
4. Lump sums and interest rates What is the relationship between interest rate
changes and present values? What about future values? Why do these relationships exist?
5. Lump sums and time periods What is the relationship between time periods
and present values? What about future values? Why do these relationships
exist?
The Right Frame of Time In Finance
6. Annual percentage rate What is the APR? How is it calculated, and what is its
influence on present and future values?
7. EAR and APR Discuss the difference between the effective annual return
(EAR) and the annual percentage rate (APR). Discuss the advantages and
disadvantages of both rates and possible situations where each would be
appropriate.
126 4 The Right Frame of Time
8. More frequent compounding What is the relationship between the number of
compounding periods per year and present values? What about future values?
Why do these relationships exist?
9. Ordinary annuity What are the four characteristics of an ordinary annuity?
Give two real-life examples of an annuity.
10. Annuities, interest rates, and time periods Discuss the relationships between
the interest rate and the present and future value of annuities. What about the
relationship between time periods and the present and future value of annuities?
Be sure to explain why these relationships exist.
11. Interest rates Suppose you have $1,000 to invest and are considering
two alternative options. Option 1 has an APR of 10 %, compounded
quarterly, while option two has an APR of 12 %, compounding annually.
What is your thought process in deciding between the two? Why is it not as
easy a question as it first appears? How could you definitively distinguish
between the two?
12. Annuities and lump sums What is the difference between investing $120 at
the end of the year and investing $10 at the end of each month of that same
year?
13. Loan types What are the basic characteristics of the three loan types: pure
discount, interest-only, and amortized loans. How do they differ? In what
instances would you expect to see each of these?

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