INDIVIDUAL ASSIGNMENT 2

1.What is the difference between simple interest and compound interest?

 Simple interest is interest paid (earned) on only the original amount, or principal,
borrowed (lent).
 Compound interest is interest paid (earned) on any previous interest earned, as
well as on the principal borrowed (lent).
2. What are the nominal interest rate and effective annual interest rate?
 The nominal interest rate (INOM) (or called quoted or stated rate or annual
percentage rate (APR)) is the rate that credit card companies, student loan officers,
auto dealers and so forth, tell you they are charging on loans.
 The effective annual interest rate is the interest rate compounded annually that
provides the same annual interest as the nominal rate does when compounded m
times per year.
3. How to calculate the present value and future value of single amount, annuities
and mixed flows? Note that explain the terms of formulation.

- Single amount
 The future value of single amount:

 The present value of single amount:

Where:
FV: Future value, or ending amount, of your account after N periods
PV: Present value, or beginning amount
i: interest rate
N: number of periods

- Annuities:
 Future value of an Ordinary Annuity:

Where:
FVA: The future value of ordinary annuity
PMT: payment amount
I: Interest rate
N: Number of periods

 Present value of Ordinary Annuity:

 Where:
PVA: The present value of annuity
PMT: payment amount
I: Interest rate
N: Number of periods.

 Future value of an Annuity Due:

Where:
FVA due (FVAD): The future value of annuity due
FVA: The future value of ordinary anuuity
i: Interest rate

 Present value of an Annuity Due:

Where:
PVA due (PVAD): The present value of annuity due
PVA: The present value of ordinary anuuity
i: Interest rate

 Perpetuities:

Where:
PV: The present value of perpetuity
PMT: payment amount
i: Interest rate
- Mixed flows:
 Present value of cash flows:

 Future value of cash flows:

FV=CF1 x (1+I)1 + CF2 x (1+I)2+…+ CFn x (1+I)n

Where:
PV: The present value
FV: The Future value
CF: The Cash Flow
 I: Interest rate

4. Why do financial managers concern about the time value of money?

Financial managers are concerned about the time value of money because it influences
financial decisions, from evaluating investments and financing decisions to determining
the present and future values of cash flows. This principle helps them make informed
choices regarding investment, capital structure, and resource management.

5. Do the problems from 1 to 10 and 13 at the page 65-67 in the text book.
6. Discuss with your good friend in the group about above questions: