Explain the time value of money. Why is it important|Legit essays
Posted: January 29th, 2023
Please answer 3 of the 4 question below. Each question should be answered in about 250 words (225-275).
1. Explain the time value of money. Why is it important?
2. What is the coupon rate? What is the yield to maturity (YTM)? Are they the same?
3. What is required return on an asset? How is it determined?
4. Explain cash flow from assets (CFFA). Why it is important?
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Assume the reader knows nothing about the topic and it is your job to teach the concept. Be creative. Use examples. You should not copy and cite a definition, instead try to explain it in your own words – the way you would explain it to a first-year undergraduate student.
The objective is for you to explain the concept. Thus, I recommend against citations. If you do use citations please adhere to APA format.
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SOLUTION
- The time value of money is the concept that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity. This is based on the idea that money can earn interest or be invested, so it can grow in value over time. It is important because it helps individuals and businesses make financial decisions by comparing the value of money at different points in time.
- The coupon rate is the interest rate that is paid on a bond by the issuer to the bondholder. It is usually expressed as a percentage of the face value of the bond and is paid on a regular basis, typically semi-annually. The yield to maturity (YTM) is the total return expected on a bond if the bond is held until it matures. It takes into account the current market price of the bond, the coupon rate, and the time remaining until maturity. It is important because it helps investors compare different bonds and make investment decisions. They are not the same, coupon rate is the interest rate paid by the bond issuer and YTM is the total return expected on a bond if held till maturity considering current market price and other factors.
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