Study Questions Chapter 5
51.
What is the time value of money? Why is it so important?
The time value of money is a concept that has been around for ages. It basically is the concept
that a dollar received today is worth more than a dollar received in the future. This important
because if you have a dollar today you can invest that dollar and draw interest on that dollar,
where as if you do not get that dollar till a year later than the you lose out on the interest earned
on that dollar for a year.
52.
The processes of discounting and compounding are related. Explain this relationship.
The processes of discounting and compounding are related in the sense that they are used to find
the time value of a dollar. Compounding finds the future value of a lump sum of money.
Discounting finds the present value of a future lump sum of money. They use the same
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 Spring '09
 EDWARDDAVID
 Time Value Of Money, FVn

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