Time Value of Money Concept (TVM)
Money has a time value, because a dollar today is more valuable than a dollar year hence due to impact of inflation. In other words, money has time value, as money in hand today is worth more as compared to money to be received in future. There are some other reasons that show why money has a time value. The individuals prefer current consumption in terms of save or invest the money to future consumption due to gaining satisfaction from consuming goods and services. Since a dollar that is invested today has power to increase or grow over time due to a fixed rate of return on investment (Lewis, McGrath & Seidel, 2010).
As per get quick assignment help experts, there are some real life scenarios in which time value of money concept can be applied. For example, in retirement planning as well as making personal investment decision, capital budgeting decision and equipment purchase decision, time value of money concept can be applied by the individuals and firms.
Difference between APR and EAR
Annual percentage rate (APR) refers to a simple interest rate that does not consider effect of interest compounding when interest is paid more than one year. On the other hand, effective annual rate (EAR) refers to a true or compound interest rate that considers the compounding of interest during calculation. Along with this, APR is used to specify interest cash flow related to loan, mortgage or bank saving account, while EAR is used to measure opportunity costs or return of a financial instrument (Melicher & Norton, 2010).
EAR is more relevant for financial decision making, because it is helpful to measure or determine true annual return to the lender. Additionally, it reflects the impact of compounding frequency on return or interest than APR that is helpful for lender to make financial decision (Smart & Megginson, 2008).
Required Law for Disclosure of APR
Legal refers to a practice that follows all the laws, regulations, rules and legal requirements which are set by government of the country, government regulatory organizations and courts. There are various Federal Deposit Insurance Corporation laws, regulations and legal requirement that require the disclosure of APR in order to provide protection to consumers or lenders. The Federal Truth and Lending Law requires the financing disclosure of APR to provide uniformity or regulatory among various credit sources (FDIC, 2012).
APR vs. EAR
The APR vs. EAR means that a consumer is being charged two different rates due to difference between these two interest rates. It is because; APR is a nominal interest rates that does not consider compounding of interest, while EAR is an effective rate that considers compounding frequency in determination of interest amount (Melicher & Norton, 2010). Along with this, due to different purpose of borrowing or lending, a consumer is being charged two different interest rates.
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