Time Value of Money and Bond Valuation

TimeValue of Money and Bond Valuation

TimeValue of Money and Bond Valuation

Theconcept of time value of money proposes that the money gotten at adistinct duration contain a specific value. To make this conceptsimpler, the time value of money is the concept that a specificamount of cash in one’s hand now is far much valuable as comparedto the same amount at a later date. The work of a manager is tocomprehend the reason as to why these two are distinct as well as inwhat way they are made similar [ CITATION Cli12 l 1033 ].Time value of money is a concept to knowand comprehend the cash flows that happened at a particular timedistinctly. Most company’s monetary decisions need a contemplationconcerning the concept of time value of money. For this reason,corporate managers have to ever focus on augmenting the wealth ofbondholders. Augmenting the wealth of bondholders, to a larger extendis dependable on the cash flows timing from other options such asinvestment [ CITATION Cli12 l 1033 ].Corporatemanagers can use methods of net present value and internal rate ofreturn.

Sinkingfunds are used by firms to save cash to pay off the shares allotted.The firm will set aside some cash in the sinking fund to settle itsdebts. Bondholders are sure of getting back their initial investment.Sinking funds helps bondholders know that the firm won’t sinkanytime soon. On the other hand, sinking funds can be disadvantageousto bondholders since some of their money may be used to buy theshares and that means they will lose their interest [ CITATION Cli12 l 1033 ].

Thisis a fundamental knowledge to managers since they can determine whento use sinking fund and how to consider all matters pertainingfinancial decisions.

References

Roberts, C. (2012, may 5). Account Learning. Retrieved from Account Learning web site: http://accountlearning.blogspot.com/concept-of-time-value-of-money.html

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