Question

Could you do the handwriting for the questions? Thank you!

Your client, for whom you are writing the report, is a data scientist. His plan is to retire in the next 10 years, and is therefore looking to invest more heavily in financial products. While his knowledge of maths and statistics is extensive, his knowledge of financial theory and financial mathematics is almost non- existent. He is looking for investments for both short-term and long-term returns. He has completed some research and has found a number of investments that he wishes to have assessed to the extent that they may be viable investment options. He has specific investment criteria, and his suggested investments are based on this criteria, therefore he does not expect you to identify additional investment options for him As he wishes to invest into securities for retirement, only the viability of the investment(s) should be considered in this report. Lastly, while you expect that your client has a good base salary you have little knowledge of his assets or liabilities or overall financial position therefore it is impossible to know how many of these investments he can purchase / invest. Therefore you are expected to provide advice on each investment in isolation from the other investments, i.e. not as a portfolio of investments Client's Financial Questions: . Describe the time value of money and how this concept is used in an everyday context. Why is it so important in the field of finance? Explain the concept of maximising / enhancing shareholder wealth and why maximising the value · a company's shares is an appropriate method for management. Show the differences between the effective rate or return and a nominal rate. In what circumstances can we use these to evaluate different investment opportunities? · Describe, using diagrams if needed, how the present value and the future value of an annuity is calculated and the differences between an ordinary annuity and an annuity due? .

Answer 1

1. Time Value of money is actually the benefit which can be received now and not on a later date for the same amount of money. In investment terms, the investor can have a greater benefit in if they don't spend their money elsewhere and invest it somewhere because the time value of money can actually allow them to earn a favorable return on this investment. Therefore, when it comes to finance, it is quite important to understand the value of money today rather than in the future because a penny in a hand today is worth more than anything promised in the future. Plus if that penny is in our hand we can invest it somewhere and earn some interest and also gain on capital. Inflation is one of the factor why money in hand today is worth more than in the future.

2. Maximizing shareholder's wealth is basically trying to push the stock price of the company upwards. So when the stock price of the company increases the wealth of the shareholder's is automatically maximized. Shareholder's have certain agents who looks after their finance interest. The main aim of the shareholder's is to earn profits and a good return. So the appropriate method of management is to maximize the company's shares because both the objectives of shareholders can be achieved i.e profits and great return.

3.A Nominal interest is a rate which is not adjusted for the inflation and nominal interest rates have to be converted into annual compound rates because if not done so they become incomparable and this conversion of the nominal rates is called effective interest rates.

4. Present Value of annuity = P { 1- (1+r)^-n / r } where,

P = Periodic payments r = rate of interest n = no of periods

Future Value of Annuity = P { (1+r)ⁿ -1)/ r) where,

P = Periodic Payments r = rate of interest n= no of periods.

Annuity Due is an annuity where the periodic payments are done at the beginning of the period whereas an Ordinary Annuity is an annuity where the periodic payments are done at the end of the period.