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Chapter 09: Time Value of Money Chapter 9 Time Value of Money Discussion Questions 9-1. How is the future value (Appendix A) related to the present value of a single sum (Appendix B)? The future value represents the expected worth of a single amount, whereas the present value represents the current worth. FV = PV (1 + I ) n future value ( 29 lue Present va 1 1 FV PV + = n i 9-2. How is the present value of a single sum (Appendix B) related to the present value of an annuity (Appendix D)? The present value of a single amount is the discounted value for one future payment, whereas the present value of an annuity represents the discounted value of a series of consecutive future payments of equal amount. 9-3. Why does money have a time value? Money has a time value because funds received today can be invested to reach a greater value in the future. A person would rather receive $1 today than $1 in ten years, because a dollar received today, invested at 6 percent, is worth $1.791 after ten years. 9-4. Does inflation have anything to do with making a dollar today worth more than a dollar tomorrow? Inflation makes a dollar today worth more than a dollar in the future. Because inflation tends to erode the purchasing power of money, funds received today will be worth more than the same amount received in the future. 9-1 Chapter 09: Time Value of Money 9-5. Adjust the annual formula for a future value of a single amount at 12 percent for 10 years to a semiannual compounding formula. What are the interest factors (FV IF ) before and after? Why are they different? ( 29 Semiannual 3.207 20 n 6%, i Annual 106 . 3 10 n %, 12 i A Appendix FV PV FV IF = = = = = The more frequent compounding under the semiannual compounding assumption increases the future value so that semiannual compounding is worth .101 more per dollar. 9-6. If, as an investor, you had a choice of daily, monthly, or quarterly compounding, which would you choose? Why?... View Full Document

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