Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

Which rate is used to discount future cash flows to their present value when valuing Treasury Inflation-Protected Securities (TIPS)?

The inflation rate

The nominal interest rate

The coupon rate

The real interest rate

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Verified step by step guidance

Understand the concept of Treasury Inflation-Protected Securities (TIPS): TIPS are government bonds designed to protect investors from inflation. Their principal value adjusts based on changes in the Consumer Price Index (CPI).

Recognize the importance of discounting future cash flows: To determine the present value of future cash flows, a discount rate is applied. This rate reflects the time value of money and the risk associated with the investment.

Identify the correct discount rate for TIPS: Since TIPS are adjusted for inflation, the appropriate rate to discount their future cash flows is the real interest rate. The real interest rate excludes the effects of inflation, making it suitable for inflation-protected securities.

Clarify why other rates are not used: The inflation rate is not used because it does not account for the time value of money. The nominal interest rate includes inflation, which is already accounted for in TIPS adjustments. The coupon rate is specific to the bond's periodic payments and does not reflect the overall discounting of future cash flows.

Conclude that the real interest rate is the correct choice: The real interest rate ensures that the valuation of TIPS accurately reflects their inflation-adjusted nature and the time value of money.