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MGT201 Financial Management Graded Discussion Board (GDB) NO.1 Solution and Discussion Fall 2013 Due Date: November 22, 2013

Topic for Discussion: “Present Value and Discounting?”

GDB Question:

Few days ago, the State Bank of Pakistan (SBP) has raised interest rate up to 9.5 percent from 9.0 percent, in line with requirements set by the International Monetary Fund. This increase was in a need to curtail rising inflation by tightening the flow of liquidity through higher interest rate. You were planning to purchase an insurance policy. What will be the effect of this rise in interest rate on:

a)        Present value of insurance policy

b)       Future value of insurance policy

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Replies to This Discussion

any idea?

G G WHY NOT.AP START KRAIN WITH WORDS THAT BOTH WILL INCREASE WITH INCREASE IN INTEREST RATE

bhai smj nai aarai k kahan se shoro krein

Please Discuss here about this GDB.Thanks

Our main purpose here discussion not just Solution

We are here with you hands in hands to facilitate your learning and do not appreciate the idea of copying or replicating solutions.

Present Value Versus Future Value?


Present value is a fundamental concept in the world of finance. It refers to the current worth of a future stream of cash flows or amount of money at a given rate of return. Future value is the dollar amount that the investor will receive in the future. Analysts arrive at present value through the discounting process -- discounting future value. The concept helps you make financial decisions, especially when you are considering expected future returns.

JUST IRRELEVANT

Discount Rate:

This is the interest rate that is used to convert between future values and present values. Note that the process of calculating present values is often referred to as “discounting” because present values are generally less than future values.

a)        Present value of insurance policy

As the interest rate will increase present value of insurance policy will also increase:

suppose:

investment in insurance policy( present value) = 100 $

Years to  maintain  investment = 10

Rate of interest is 9.0%

then by calculating its future value we find:-

Future value is 237$

Now if our years and investment remain same but we increase our rate of interest then calculation will be ass below:-

investment in insurance policy( present value) = 100 $

Years to  maintain  investment = 10

Rate of interest is 9.5%

then by calculating its future value we find:-

Future value is 248$

So we can see as the interest rate increase the future value of investment(insurance policy) will also increase.

b)       Future value of insurance policy

As the interest rate will increase future  value of insurance policy will Decrease:

suppose:

Earning after ten years ( Future value) = 100 $

Years to  maintain  investment = 10

Rate of interest is 9.0%

then by calculating its Present value we find:-

Present value is 42 $

Now if our years and Earning remain  same but we increase our rate of interest then calculation will be ass below:-

Earning after ten years ( Future value) = 100 $

Years to  maintain  investment = 10

Rate of interest is 9.5%

then by calculating its future value we find:-

Future value is 40$

So we can see as the interest rate increase the present value of invest policy will decrese

A HEADING MA B KA JAWAB OR B HEADING MA A KA JAWAB ADD HOA HA.ISNT IT WAITING FOR UR ANS FIRENDS

I AM CONFUSED ONE LINE MA JAWAB DAIN

WHAT WILL HAPPEN TO PRESENT VALUE     INCREASE/DECREASE

                                FUTURE VALUE       INCREASE/DECREASE

START MA KUCH OR END MA KUCH HA.:(

Before we going to answer of gdb 1st understand the  Present Value Versus Future Value in world of finance. Present value is a fundamental concept in the world of finance. It refers to the current worth of a future stream of cash flows or amount of money at a given rate of return. Future value is the dollar amount that the investor will receive in the future. Analysts arrive at present value through the discounting process -- discounting future value. The concept helps you make financial decisions, especially when you are considering expected future returns.

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