Time value of money is the greater benefit of receiving money now rather than later. It is based on time
preference. The principle of the time value of money explains why interest is paid or earned. Interest,
whether it is on a bank deposit or debt, compensates the depositor or lender for the time value of
money. An important part of time value of money is discounting and compounding. “The terms are used
when a person needs to determine exactly what the time value of money is” (Keown, Martin &Petty,
2017).The rate of return is usually calculated in accordance to an annual return on investment. AN
investor earns a return on the original principle amount of the investment as well as on any prior period
investment income. Investment earnings are compounded as time advances. So considering the fact
that the discount must match the benefits obtained from a similar investment asset, the discount yield
must be used within the same compounding mechanism to negotiate an increase in the size of discount
whenever the time period of the payment is delayed or extended. The discount rate is the rate which
the discount must grow as the delay in payments is extended. This fact is directly involved with the time
value of money and the calculations. The time value of money implies that there is a difference between
the future value of a payment and the present value of the same payment. The rate of return on
investment should be the dominant factor in evaluating the market’s assessment of the different
between the future value and the present value of a payment and it is the market’s assessment that
counts the most. Therefore, the discount yield, which is predetermined by a related return of
investment that is found in the financial markets, is what is used within the time value of money
calculations to determine the discount required to delay payment of a financial liability for a given
period of time.
For the scenario presented, I would choose to go with the bank that compounds daily, which is bank C.
The daily compounding means that the principal amount grows on a daily basis rather than monthly,
semi annually or annually.
In order to calculate the minimum return accepted on an investment considering all options, investors
use the required rate of return as a way to do that. When we think about the rate increasing, in turn it