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Time Value Of Money Essay

768 words - 3 pages

Annuities and Time Value of MoneyThe purpose of this paper is give definitions of financial terms related to annuities and time value of money and how they are related to investments. Knowing the financial terms and how they relate to monetary values and the futures of those values is vital to the success of any investor. Having a deeper understanding of key financial terms related to investing can create a optimum baseline for investors.Interest rates and CompoundingInterest rates and compounding interest rates are rates of values that are applies to annuities or investments. The rate applied to a specific monetary value will increase annually or quarterly based on the terms of the investment or loan and added to the principal. With regular interest rates, usually in percentages, the amount increases based on the principal without an increase annually or quarterly just on the total amount with a future value. With the use of compounding the interest is added to the principal and the amount of interest is applied to the total and recalculated using the increased principal. Finding the best opportunity for any investment is important and knowing the difference in how interest rate are calculated can maximize profits or minimize cost.Present Value and Future ValuePresent Value is defines as "the amount that a future sum of money is worth today given a specified rate of return." (Investopedia 2007) This can be restated as a way to measure the expected return on a capital investment. The present value today is used by corporation as well as individual in cases to determine what something will be worth in over time. Future value is a more definitive amount based on specific numbers. Take the present amount invested multiplied by a specific annual interest will give a specific future value. There is a distinct difference in future value and present value, knowing the difference is important. Knowing the real value of those values is even more vital.Opportunity CostOpportunity cost is defined as "The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action." (Investopedia 2007). An example of opportunity cost would be going to college and the money not earned if someone had worked instead. The best part of attending school...

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