Difference Between Discount Rate and Interest Rate
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Questions and Answers

The terms 'discount rate' and 'interest rate' can be used interchangeably.

True

What does the time value of money primarily concern?

  • The relationship between interest rates and inflation rates
  • The equivalence of cash flows with different values
  • The relationship between current cash flows and future cash flows (correct)
  • Equivalence relationships between cash flows occurring on the same date

    • If you received $9,500 today and paid $10,000 one year from now, why would these amounts be considered equivalent?

  • Due to the equal values of the two cash flows
  • Because of the difference in the interest rates applied to each cash flow
  • Because you prefer to receive money sooner rather than later
  • As a result of the concept of discounting future cash flows (correct)

    • What is the purpose of an interest rate in the context of the time value of money?

    <p>To reflect the relationship between cash flows occurring on different dates</p> Signup and view all the answers

    How is an interest rate calculated based on the example provided in the text?

    <p>$500 divided by $9,500</p> Signup and view all the answers

    How can interest rates be understood?

    <p>As compensation for investors accepting investments</p> Signup and view all the answers

    Why is discounting a future amount relevant in understanding equivalence in time value of money?

    <p>To compare cash flows occurring at different points in time</p> Signup and view all the answers

    How does an investor benefit from understanding the time value of money?

    <p>By making informed decisions on investments based on future cash flows</p> Signup and view all the answers

    What is the significance of a discount rate in relation to time value of money?

    <p>It signifies the compensation required to adjust for differences in payment timing</p> Signup and view all the answers

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