Ziay!

gugu1013

1.Why are time value concepts important in ordinary business dealings?
2.In a retail store a discount is a price reduction, what is a discount in a financial?
3.Discuss mortgage loan in term of the time value of money and loan amortization
4.Describe the underling meaning of compounding periods. How does it relate to time?
5.Explain the NPV method in your own words. Why is a higher NPV better than a lower one?

Kes

The source is an excellent intro to financial terms, especially the "dictionary" which covers acronyms and phrases.

Off the top of my head:

1. Time value recognizes that value changes with time. A stock option (to buy or sell stock at a fixed price) is a wasting asset that may be worth less and less as the option date approaches and worth nothing if not exercised. A contract to erect a building three years from now must recognize that the cost of materials and labor may change by then.

2. In financial, "discount" can mean that something has been taken into consideration. The price of a stock today discounted the fact that earnings are expected to double by next year.

3. As a mortgage is paid off monthly at a fixed amount per month, the debt remaining is less with each payment reducing the interest (but not the interest rate) and more and more of the payments will go to reducing debt as the mortgage is amortized, reduced to zero over time.

4. Compounding means that if you receive interest on a bank savings account, you also receive interest on any previous interest received and kept in the account. Compounding may be calculated daily on the account balance (interest posted) or perhaps semi-annually or annually depending on your agreement with the bank. By extension, If the value of stocks in your IRA increase 10% per year, the value of the investment compounds (Take say $10,000 and multiply it by 0.10 for each year up to your retirement (and it continues to compound as you take out money during retirement). This is the hidden value in SS personal savings accounts.

5. Net Present Value relates future value with the present value. If you invest in IT (information technology) today, what will its future value be to your company, etc.?