Time value of money - module 10

Question 1

where is simple interest still used?

Answer 1

short term money market instruments

Question 2

what does the banking sector use to finance short term commitments

Answer 2

The banking sector uses instruments like commercial paper, bills, and Negotiable Certificates of Deposit (NCD’s) to name just a few to finance their short term commitments

Question 3

what does the government use to finance short term financial commitments

Answer 3

instruments treasury bills (T-bills) to finance their short term commitments

Question 4

what does it mean for the investor that these instruments are short term

Answer 4

These instruments are typically short term in nature and the investor receives only the full nominal or face value at maturity

interest - This is adjusted for in the price an investor pays for the instrument called “the consideration”. - the instrument is discounted to account for the interest that it will accumulate

Question 5

why are money market instruments called discounted securities

Answer 5

called discount securities because they are issued at a discount on face or nominal value. The discount rates are determined by the various money markets (a subject for later study).

Question 6

FV and PV

Answer 6

future value and present value

Present value factor is the reciprocal of the future value factor.