Explain concepts such as time value of money, present value and discount rate, and explain how they are related to the calculation of fair values of securities such as Bonds or Shares. I want to see the answer to this question and steps.
Explain concepts such as time value of money,
I want to see the answer to this question and steps. Thanks
Time value of money is a concept which says the value of money today is worth more than the value tomorrow.
Present value is the value of an asset in today's time.
The discount rate is the rate at which the future value of an asset can be converted into present value.
Time value of money in simple language says that the money you have now will not be worth the same in the future. The reason being the money you have now will face inflation and the amount of money will lose its value over time. For example, you have $100 now and you do not deposit it into a bank or something and the inflation for the year is 6%. So the value of $100 held at the starting will lose its value by 6%.
Present value is the current value of all the cash flows that are to be received in future. Present value of an asset is worth more than its future value because the money which is available at present can be invested elsewhere and earn some rate of return at least to cancel out inflation.
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