ATD – Fundamentals Of Finance November 2019 Exam

Ever been in an exam room and a certain question looks very simple yet the answer looks too far?

Check out question 2 (a) (i)

In relation to time value of money, describe three interpretations of interest rates (3 marks)

Suggested answer

Interpretations of interest rates

  1. Required rate of return – this is the return required by investors or lenders to postpone their current consumption
  2. Discount rate – is the rate used to discount future cash flows to allow for the time value of money (that is, to bring a future value equivalent to present value)
  3. Opportunity cost – is the most valuable alternative investors give up when they choose what to do with the money


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