University of Phoenix Material

Time Value of Money

Refer: to Ch. 1, “Time Value of Money” section of Personal Finance.

Respond to the following questions in 50 to 100 words each.

1. What is the definition of Time Value of Money? Please define present and future value.
2. The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

3. How is simple interest calculated? Provide an example of how it would be calculated. For example, you might use your student loan or a car loan to show this calculation.
The principle of my husband truck is 25,000 his annual interest rate is 15% over a four year period, so we end up paying 7,000 more when the truck is paid off. I know 15% is high but when you are building your credit back up you get a poor interest rate. We are working very hard to build it so we can refinance for a better interest rate.

For questions 3 – 5, use the Bankrate Compound Interest Calculator http://www.bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx and input provided figures, changing the interest rate, and the compounding of the interest rate (annually and quarterly) as delineated below:

4. You place \$1,500 in a savings account earning 3% interest compounded annually. How much will you have at the end of four years? How much would you have at the end of four years if interest is compounded quarterly? I would have earned 1,690 in intrest if compounded annually. I would have 1,688 if interest was compounded quarterly.

5. Change the interest rate to a higher rate. How much will you have at the end of four years if interest is compounded annually at a rate of 5%? How much would you have at the end of four years if interest is compounded quarterly? I would have 1,830 if interest was compounded annually. I would have 1,823 if interest was compounded annually

6. Now change the interest rate to a lower rate. How much will you have at the end of four years if interest is compounded annually at a rate of 2.5%? How much would you have at the end of four years if interest is compounded quarterly? I would have 1,656 if intrest was compounded annualy. I would have 1,657 if interst was compounded quarterly.