week 3

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Q.1 What are some of the assumptions behind the TVM calculations? How do these assumptions limit our application of these calculations?

Q.2 write a reply for this article

Some of the basic assumptions behind the TVM is that, a dollar today is worth more than a dollar in the future.

TVM presume five variables namely, present value PV, Future value FV, number of period, interest rate and payments.

The assumptions behind the TVM follow that,

-Money is always productive and repeatedly invested 

- Short term interest rate are similar to line to long term interest rate, implying that the yield curve is flat

-Payment made are always equal can be classified all inflows or outflows

-The interest rate is stable throughout the time period

Limitation of the application of TVM

-We cannot always predict the future and be accurate about our forecasts in cashflows

-Many external factors can play spoilsport be it economic and political factors

-Citations of default risk where the lender may not be able to pay back to us