Financial Fundamentals: Interest and the Time Value of Money

Photograph: Professor Barbara Scofield presenting at Washburn Law.Professor Barbara Scofield was hosted by the Business and Transactional Law Center on September 26, 2018. She was the third speaker of the Center's Fall 2018 Financial Fundamentals Series. Scofield, a professor of accounting in Washburn University's School of Business, explained interest and the time value of money, and how those concepts interact with the practice of law.

Scofield began her explanation of the time value of money by discussing the Kansas Lottery. She compared a lump-sum cash option for winning the lottery with the more heavily advertised jackpot amount. The jackpot amount, she explained, is a much higher number because it involves payout over 29 years and enables the state to purchase an annuity that generates interest over the years. Scofield also demonstrated how the time value of money affects decisions of particular interest to attorneys, such as settlements of lawsuits that may be paid in lump sums to compensate for the loss of income over a period of time and structuring financing for businesses.

Scofield explained the differences between simple interest and compound interest, and walked through several handouts with the formulas used to compute interest amounts. She explained the benefit of having compounding interest when investing, and used retirement funds as an example to show students the amount of money that can be generated when it is invested in a high-interest-rate IRA.

Scofield pointed out the benefits of business loans structured with no-periodic-payment compound interest, and explained the situations in which this type of arrangement would be approved, such as with a company like Amazon. She explained the negotiating power that Amazon needed to negotiate a loan in which all the principal and accumulated interest was to be paid at once, 20 years later.

Washburn Law thanks Professor Scofield for taking time from her teaching and scholarship to help the Business and Transactional Law Center provide the Fall 2018 Financial Fundamentals Series.

Photograph: Students at Washburn Law listening to a time value of money presentation by Professor Barbara Scofield.