Wk 2 - High Fantasy Author Analysis. Mathematics & Economics Essay

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Mathematical Theory of Interest
Time Value of Money
It is essential to note that the worth of money available today is more than the worth of the same amount of money in the future. This is because of the inherent value of money attached to time. The amount of money available today can be put in the investment to earn interest with time. The worth of money has the potential to grow over a given period of time. Therefore, money available in the present is regarded to be more valuable than the same amount in the future. The value of money is also determined by the discounting rate used to calculate the present and future values of money. Therefore, regarding the two facts about money, people can determine and calculate what to borrow and what to invest to achieve their given targets in the future.
Interest should be considered for the amount of money being borrowed. Interest refers to the amount of money paid regularly at a given interest for delaying repayment or using the money that was borrowed. In most cases, it is expressed as an annual percentage of the borrowed money (principal). There are several things that determine the rate of interest to be paid. These include expected inflation, liquidity of security, maturity premium, default risk instalments, and the real risk-free rate. In cases of expected inflation, the market prices are anticipated to rise, hence affecting the purchasing power of the currency. Therefore, the interest is reduced by a rate referred to as the inflation rate. The liquidity premium is the ability of the securities to be converted to cash. Securities that can easily be converted to cash or highly liquid premiums are compensated with lower interest rates and vice versa.
There are two types of interest depending, on how payment is made. These are simple and compound interests. Simple interest refers to where interest is paid on the principal only. Principal refers to the total money invested or hired. The formula of determining the simple interest on the sum of money hired or invested is given by I=PRT, whereby P is the Principal, R is the rate of interest, which is percent earned, or charged, and T is the time that money is hired or invested. On the other end, compound interest refers to the interest that is paid on both the principal and accumulated interest. This is given by the equation A= P (1+ r) ^t whereby A is the amount accumulated, P is the principal, r is the rate of interest or the rate of discounting, and t is the period of time. The calculation of time value of money can be applied in several fields such as stock valuation, financial analysis of firms, examine the firm’s projects, and in the valuation of bonds. There are various calculations for the determination of the time value of money.
Present Value of Money
The present value of money refers to the current value of a future amount of money in regard to the specified and already calculated rate of return. The present value can be used to determine the amount of money that should be invested to achieve a certain amount in the future. There are three things one needs to consider when determining the present value. These are; the sum of years the money will be put to investment, the sum of money that ...