A Paradox Within The Time Value Of Money: A Critical Thinking Exercise For Finance Students

Abstract

This study presents a paradox within the time value of money (TVM), namely, that the interest-principal sequence embedded in the payment stream of an amortized loan is exactly the opposite of the interest-principal sequence implicit in the present value of a matching annuity.  We examine this inverse sequence, both mathematically and intuitively, and argue that it provides an excellent exercise for finance students to explore, both to enhance their critical thinking skills as well as to strengthen their understanding of TVM concepts.  Additionally, such an exercise will involve them actively in the learning process, as mandated by AACSB International’s Eligibility Procedures and Standards for Business Accreditation.