Critically reflect on the importance of present and future values. What factors

Question

Critically reflect on the importance of present and future values. What factors must be considered when calculating present and future values? What other qualitative factors play into present and future value decisions? Perhaps you have opportunities in your professional life to use present and future values. What are some real or potential applications of these concepts?

We also looked at expected returns. Why do bond values go down when interest rates go up? Is this true in the opposite direction?

Explanation / Answer

Importance of present value and future value : Present value and futue value concepts are important in the fields od accounting and finance. There are many applications of Present value and futue value including leases , investment decisioons bond problems,mortgages,money management, retirement and valuation of goodwill. These will give time value of money.

Factors to be considered in present value and future value:

The relation between Present value and futue value indicated by following formula

FV = PV(1+i)n
The number of periods involved in the computation of the values, compound interest over a specific period of time, the calculations have to consider annual interest rates, present value,payments and future value

Qualitative factors play into present and future value decisions:

1.RISK: The amount of return the investor will receive as compared to other investments that would produce a cash flow with the same risk level

2.TIME: The amont of cash flow that could be recived will vary based on the time

3. Size of the cash flow: The larger the cash flow the larger the present value and vice    versa

4. Interest rate: The amont of cash flow will be changed by changing the interst rate

Potential applications of present and future value :

It is useful in taking decision ofinvestments like purchase of new production equipment

Depositing idle money in banks or investing in banks which gives more returns

Interest Rate and bond prices have inverse relationship this is because of the concept of opportunity cost. Investors constantly compare the returns on their current investments to what they could get elsewhere in the market. As market interest rates change, a bond's coupon rate—which, remember, is fixed—becomes more or less attractive to investors, who are therefore willing to pay more or less for the bond itself

                        It is true that bond value goes up when interest rates go down

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