heres the final assignment
1. What is the time value of money and how can compound interest be used to
calculate the present value of any future amount of money?
Time value of money also known as the present discounted value of money is based
on the premise that money held right now has a greater value in the future (Maria &
Kennedy 115). This is because the amount of money that one has at the moment has the
potential of earning interest and therefore in the future it will be worth much more than its
value in the current time (Dwivedi 87).
Compound interest can be used to calculate the value of an amount in the future. The
process of compounding is based on the concept of exponential growth of an investment
along with the initial principal. In this case, the initial amount changes at every end of the
stated compounding period. For instance if an investor has $10,000 and would like to
invest it in a project that earns him a compounded interest of 1% per month then each
month the principle will have increased by 1% so that by the end of the year the principle
itself will be a larger amount than the initial 10,000 invested.
In the case that the investor would like to know the value of his $10,000 after a year
he can simply use the compound interest formulae illustrated below and come to a
conclusion on whether he is interested in the investment.
Formulae = [P (1 + i)n] – P
= P [(1 + i)n – 1]
= 10,000 ( 1 + 0.05)12 – 1)
= 7958.56 +10000
= $17958.56 this will be the value of the investor’s money at the end of the year
2. How is the word "risk" used in financial economics and what is the difference
between diversifiable and non-diversifiable risk?
A risk is situation that could possibly lead to losses. When the possibilities of a loss
are more eminent that the situation is termed as high risk and when the probability of the
risk occurring are low the situation is low risk (Dwivedi 120). Diversifiable risks are also
referred to as unsystematic risks are when a significant part of the asset is exposed to
certain risks that can be reduced by diversification. The causes of the risks are random
and can occur at any given point in ti...