Understanding Money

In: Business and Management

Submitted By rohitshaw07
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Understanding Money
Money is a standardized unit of exchange. The physical form of money is currency. Different countries have different currencies. Interest is the amount earned or paid on money which is lent. Compound interest is the ‘interest earned on interest’. Compound Interest (C.I)= [P*(1+r/100)^t – P] P=Principal amount r=Rate of interest t=Time period in years Interest may be compounded annually, semi-annually, quarterly, monthly or even daily. This is known as the compounding frequency. Greater the frequency of compounding, the greater the effective return or yield. Always adjust the ‘r’ to map to the ‘t’. That is, if the compounding is quarterly, then take the quarterly interest rate, not the annual rate.

Compounded Annual Growth Rate (CAGR)
If we come across a projection of say, sales or profit 3 years from now, we need to arrive at a rate at which the sales was growing each year to arrive at that future number. That growth rate, which assumes compound growth each year, is called the CAGR. CAGR = (Final Value/Initial Value)1/n- 1 It’s defined as ‘the interest rate at which a given initial value will ‘grow’ to a final value in a given amount of time.’

Time Value Concept of Money
Money earns interest with time. That means, INR 100 today is worth different amounts at different points in time. Hence, money has a ‘time value’. The fundamental concepts involved in understanding the time value of money are: Future Value of Money: ‘Future value of an amount is the amount today’s money turns into at a point of time in the future (assuming a certain rate of return)’. Future value is arrived at by multiplying the principal invested today by the compounding factor (1+r)^t .

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