What Is The Time Value Of Money And How Can Compound Interest Be Used To Calculate The Present Value Of Any Future Amount Of Money?

Discussion questions and answers What is the time value of money and how can compound interest be used to calculate the present value of any future amount of money Time value of money refers to the idea that a sum of money received today is more valuable than money received in the future. The reason for the difference in value is caused by interest and inflation. When money is receivedearlier, it can be put into an interest bearing account and earn interest. Secondly, more money later loses purchasing power due to inflation. As inflation erodes the value of money over time, money received later will pay for fewer goods than money received earlier. The compound interest rate can be used to calculate the present value of a future amount by discounting the future value to the present value. Discounting involves accounting for the effect of interest and inflation on the future amount. References Atrill, P. and E. McLaney. Accounting and finance for non-specialists. 8th Ed. Harlow, UK Pearson Publishing, 2013. How is the word risk used in financial economics and what is the difference between diversifiable and non-diversifiable risk In financial economic risk is the probability that macroeconomic conditions such