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Time Value of Money

Time Value of Money (TVM) compares investment alternatives by accounting for the time value of money. It can be used to analyze loans, mortgages, leases, savings, and annuities. TVM is based on the concept that $1 today is worth more than the same $1 in the future due to earning interest. A key concept is that a single payment or series of future payments can be converted to an equivalent present value today or future value at a later date using an interest rate.

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Rimmiiee Dhaliwal
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54 views

Time Value of Money

Time Value of Money (TVM) compares investment alternatives by accounting for the time value of money. It can be used to analyze loans, mortgages, leases, savings, and annuities. TVM is based on the concept that $1 today is worth more than the same $1 in the future due to earning interest. A key concept is that a single payment or series of future payments can be converted to an equivalent present value today or future value at a later date using an interest rate.

Uploaded by

Rimmiiee Dhaliwal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Time Value of Money

Introduction
Time Value of Money (TVM) is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM is based on the concept that a dollar that you have today is worth more than the promise or expectation that you will receive a dollar in the future. Money that you hold today is worth more because you can invest it and earn interest. After all, you should receive some compensation for foregoing spending. For instance, you can invest your dollar for one year at a 6% annual interest rate and accumulate $1.06 at the end of the year. You can say that the future value of the dollar is $1.06 given a 6% interest rate and a one-year period. It follows that the present value of the $1.06 you expect to receive in one year is only $1. A key concept of TVM is that a single sum of money or a series of equal, evenly-spaced payments or receipts promised in the future can be converted to an equivalent value today. Conversely, you can determine the value to which a single sum or a series of future payments will grow to atPresent Value
y y

Single Amount Annuity

Present Value is an amount today that is equivalent to a future payment, or series of payments, that has been discounted by an appropriate interest rate. The future amount can be a single sum that will be received at the end of the last period, as a series of equally-spaced payments (an annuity), or both. Since money has time value, the present value of a promised future amount is worth less the longer you have to wait to receive it.

Future Value
y y

Single Amount Annuity

Future Value is the amount of money that an investment with a fixed, compounded interest rate will grow to by some future date. The investment can be a single sum deposited at the beginning of the first period, a series of equally-spaced payments (an annuity), or both. Since money has time value, we naturally expect the future value to be greater than the present value. The difference between the two depends on the number of compounding periods involved and the going interest rate. some future

date.

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