Activity: FM1

1. Explain the significance of the time value of money in the valuation of financial
assets. Support your discussion with examples of how the time value of money
influences financial decisions.
- Time Value of Money is the concept that a sum of money is worth more now than the
same sum will be at a future date due to its earnings potential in the time duration. Its
significance to the valuation of financial assets, is that, TVM is the core principle of
finance. A sum of money in your possession is worth more than a similar sum that
will be paid in the future. The present discounted value is another name for the time
value of money. Money's value fluctuates throughout time and is influenced by a
number of things. The overall increase in prices of goods and services, or inflation,
has a detrimental effect on the future worth of money.
- One example on how the time value of money influences financial decisions is, when
you consider taking out a loan, the time value of money is one of the things that
affects how much interest you will pay. The time value of money also has an impact
on how much money you will need to save if you want to accumulate funds for your
retirement.

2. Discuss how the price of the bond is determined. State how the present value is used
as a basis for financial decisions.
- The price of a bond is determined by discounting the expected cash flows to the
present using a discount rate. The three primary influences on bond pricing on the
open market are term to maturity, credit quality, and supply and demand. Each bond
has a par value, and it can either trade at par, a premium, or a discount. The amount of
interest paid on a bond is fixed. However, its current yield, the annual interest relative
to the current market price fluctuates as the bond's price changes.
- The net present value rule is the idea that company managers and investors should
only invest in projects or engage in transactions that have a positive net present value
(NPV). It is used as a basis for financial decisions as companies are associated with
future intangible and currently immeasurable benefits or where they enable ongoing
investments to happen.
- A business will use a discounted cash flow (DCF) calculation, which will reflect the
potential change in wealth from a particular project. The computation will factor in
the time value of money by discounting the projected cash flows back to the present,
using a company's weighted average cost of capital (WACC).
- A project or investment's NPV equals the present value of net cash inflows the project
is expected to generate, minus the initial capital required for the project.