Time Value and Money

Running head: TIME VALUE OF MONEY PAPER

Time Value of Money Paper

Time Value of Money Paper

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Bonds

Bonds are one of the investment avenues which individuals, corporations, and financial institutions use to balance their investment portfolio. Bonds usually provide a predictable rate of return on investment and repayment of the initial principal amount.

When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency, or other entity known as the issuer and in return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it “matures”, or comes due. (Investing in Bonds, 2005)

Investments are made either to preserve capital funds, increase capital funds, or used as an avenue to receive dependable income from interest payments. “There are a number of key variables to look at when investing in bonds: the bond’s maturity, redemption features, credit quality, interest rate, price, yield, and tax status.” (Investing in Bonds, 2005) Depending on the investors end state goals will determine weather investing in bonds is the correct choice.

There are risks associated with the bond market which every buyer of bonds has to be cautious of. Inflation causes the value of money received in the future to be worth less than the value is worth today. Investors who rely on the bond interest to pay off future debt may come up short due to inflation, which drives down the value of the future purchasing power of the interest. There are securities however, which combat the risks associated with an increase in inflation called Treasury Inflation Protection Securities which are structured to remove the inflation risk. (Investing in Bonds, 2005) Each investor in the bond market needs to do their own research to understand how much of their securities to invest in bonds to achieve their end state financial goals. Now let us look at another investment call Certificate of Deposit.

Certificate of Deposit

Certificate of Deposit is another one of the investment avenues which individuals and corporations use to balance their investment portfolio. “Certificates of Deposit are debt instruments issued by bands and other financial institutions to investors. In exchange for lending the institution money for a predetermined length of time the investor is paid a set rate of interest” (Kennon, 2006) The time period for the Certificate of Deposit can range from a few months to years at a time. Investors find investing in Certificates of Deposit a way to maintain their current assets. There are however shortfalls investors of Certificates of Deposit have to be aware of.

“Certificates of Deposit offer higher rates of return than most comparable investments, in exchange for tying up invested money for the duration of the certificate’s maturity.” (Investorwords.com, 2005) The risk in investing in a Certificate of Deposit is the money invested is tied up for the given period of time and cannot be used for other capital investments which could yield a higher return. If the capital used to purchase the Certificate of Deposit is needed in an emergency situation penalties for early withdraw will be assessed from the capital invested. Investors who use Certificate of Deposit as an investment avenue should plan to have the capital tied up for the given period of the certificate.

Notes Receivable

Notes Receivable is an asset; which is increased with a debit and decreased with a credit. Notes Receivable is a written promise from a client or customer to pay a definite amount of money on a specific future date (People, 2003). Such notes can arise from a variety of circumstances, not the least of which is when credit is extended to a new customer with no formal prior credit history. The lender uses the note to make the loan more formal and enforceable. Such notes typically bear interest charges. The maker of the note is the party promising to make payment, the payee is the party to whom payment will be made, the principle is the stated amount of the note, and the maturity date is the day the note will be due (People, 2003).

To illustrate the accounting for a note receivable, presume that a company initially sold X amount