Time Value of Money
The time value of money is an important concept for both the corporation and private consumer alike. The "Introduction to Finance and Accounting" class opened my eyes to some new financial concepts, especially in the context of large firms with debt and equity mixes to manage. I think that the time value of money stands out because not only do I stand to personally gain from the knowledge that time is money, I can also extrapolate the concept to my professional life with regards to decisions on capital expenditures and financing terms on the receipt of goods and services. Personal

I can personally use the time value of money concept in several ways. During class, the question was posed regarding compounding interest and the most advantageous number of periods to the consumer or account holder. I gave an answer including my choice of having interest compound daily or, if possible, hourly. We discussed that a savings and loan entity would be crushed if it offered hourly compounding interest for savings, money market, or other savings instruments. Etrade, somehow, offers a daily compounding certificate of deposit at 4.5% interest. That discussion is memorable because it truly opened my eyes to the time value of money in the context of compounding interest and the number of periods to compound with. I have since begun the process of opening a certificate of deposit with Etrade to take advantage of daily compounding interest. Another personal way that the time value of money concept can be employed is in the investment of personal income and the purchase of real estate. Block and Hirt contend that understanding the time value of money lends itself to knowledge of "the effective rate on a business loan, the mortgage payment in a real estate transaction, or the true return on an investment" (Block & Hirt, 2005, p. 239). The effective rate on a loan is influenced by not only the interest that is accrued, but also the inflation rate over the period...

...Abstract
The first steps toward understanding the relationship between the value of dollars today and that of dollars in the future is by looking at how funds invested will grow over time. This understanding will allow one to answer such questions as; how much should be invested today to produce a specified future sum of money?
TimeValue of Money
In most cases, borrowing money is not free, unless it is a fiver for lunch from a friend. Interest is the cost of borrowing money. An interest rate is the cost stated as a percent of the amount borrowed per a period of time, usually one year. The current market rates are composed of three items.
The Real Rate of Interest is what compensates lenders for postponing their own spending during the term of the loan. An Inflation Premium is added to offset the possibility that inflation may eat into the value of the money during the term of the loan. In addition, various Risk Premiums are added to compensate the lender for risky loans such as unsecured loans made to borrowers with questionable credit ratings or loans that the lender may not be able to easily resell.
The first two components of the interest rate listed above, the real rate of interest and an inflation premium, together are referred to as the nominal risk-free rate. In the United States, the nominal risk-free...

...and Future Price of Money
Trident University International
FIN 501
Module 2: Case Assignment
Dr. John Halstead
One of the most important concepts about saving and investing is the timevalue of money. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. This means money paid out or received in the future is not equivalent to money paid out or received today because inflation erodes money’s buying power. Basically, the power of time is on a person’s side and the premise that cash in hand today is more valuable than the same amount in the future due to its capability of earning interest. There are three factors affecting how much an investment will grow: time, money, and interest rate. TimeValue of Money is a concept that is very important in financial management. It affects business, personal, and government finance (Harvey, 2012) Within this paper we will discuss the definition of TimeValue of Money and identifies the importance of financial managers understanding the concept.
Time, Money and Interest Rates
Time has an important impact on the future value of money....

...TimeValue of Money
The timevalue of money (TVM) or, discounted present value, is one of the basic concepts of finance and was developed by Leonardo Fibonacci in 1202. The timevalue of money (TVM) is based on the premise that one will prefer to receive a certain amount of money today than the same amount in the future, all else equal. As a result, when one deposits money in a bank account, one demands (and earns) interest. Money received today is more valuable than money received in the future by the amount of interest we can earn with the money. If $90 today will accumulate to $100 a year from now, then the present value of $100 to be received one year from now is $90.
To fully understand timevalue of money one must first understand a few terms. Present value and future value are totally different. They also have their disadvantages and advantages; it just depends on how they are used. Of course, present value is what you have right now at this present time. While future value is the amount of money you will have at a given time in the future. Future value has a tendency to be deep;...

...Abstract
In this paper, Team C will discuss the concept of the timevalue of money and the importance of this concept in business. Also, we will provide a demonstration of the use of the formula used to calculate the present and future values of money to get the present value of $100 using different periods of time and interest rates.
TimeValue ofMoney
In the world of business, it is essential to know what TVM represents and how it helps make better choices in how we spend our money. TVM is also known as TimeValue of money which is a given amount of interest earned in a period of time (Wikipedia, 2011). Each member in group “C” will use 100 as our present value and we will choose an interest rate and period. Timevalue of money concept is used to determine present and future values of money. “The timevalue of money refers to the relationship between time, money, and the rate of interest.” (Letsche, 2011). The formula consist of four components FV = Future Value, PV = Present Value, i = the interestrate per period and n= the number of compounding periods (TeachMeFinance.com)....

...TimeValue of Money (TVM), developed by Leonardo Fibonacci in 1202, 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 today is worth more than a dollar in the future. That is mainly because money held today can be invested and earn interest.
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, one can determine the value to which a single sum or a series of future payments will grow to at some future date.
The timevalue of money serves as the foundation for all other notions in finance. It impacts business finance, consumer finance and government finance. Timevalue of money results from the concept of interest.
Key Components of TimeValue of Money
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...

...In financial management, one of the most important concepts is the TimeValue of Money (TVM). TimeValue of Money concepts helps a manager or investors understand the benefits and the future cash flow to help justify the initial cost of the project or investment. Many of the assets businesses and individuals own are financed with money borrowed from others, so the understanding of TVM is crucial to making good buying decisions. To recognize how annuities affect the timevalue of money, managers need to consider the factors of interest rate, opportunity costs, future and present values of money, and compounding.
Interest Rates and CompoundingIn most business cases, borrowing money is not necessarily a free enterprise. It costs companies money to obtain funds on credit to finance various aspects of their business. The fee that a borrower pays to a lender for use of its money is interest. The annual percentage rate (APR) makes assumptions based on simple interest, which is interest only earned on the principal investment.
Another method of accruing interest is through compounding. Compound interest is not only charged on the original investment, but also assessed on the interest charged or earned for each period. "When comparing interest rates, it is best to use...

...PRESENT VALUE SO IMPORTANT FOR CORPORATE FINANCE?
The importance of concept of present value to the world of corporate finance is that present value calculations are widely used in business and economics to provide a means to compare cash flows at different times. Present Value’s definition and simplistic formula used for normal purchases, the concept’s importance to corporate finance and why present value is the very first topic taught in finance classes explain that present value is an essential knowledgeable tool to ensure we make the best decisions with our money.
However, first, What Does Present Value - PV Mean? Present value is “the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations.” Through the definition itself, an importance to corporate finance is explained as well as why professors begin a finance course with a basis explanation in the timevalue of money – discounting and investment risk included.
In more detail, capital investment decisions...

...TimeValue of Money
Exercise
1. If you invest $1000 today at an interest rate of 10% per year, how much will you have 20 years from now, assuming no withdrawals in interim?
2. a. If you invest $100 every year from the next 20 years starting one year from today and you earn interest of 10% per year, how much will you have at the end of the 20 years?
b. How much must you invest each year if you want to have $50000 at the end of the 20 years?
3. What is the present value of the following cash flows at an interest rate of 10% per year? (Hints: don’t need to use the financial keys of your calculator, just dome common sense)
a. $100 received five years from now
b. $100 received 60 years from now
c. $100 received each year beginning one year from now and ending 10 years from now
d. $100 each year beginning one year from now and continuing forever
4. You want to establish a “wasting” fund, which will provide your with $1000 per year for four years, at which time the fund will be exhausted. How much must you put in the fund now if you can earn 10% interest per year?
5. You take a one-year installment loan of $1000 at an interest rate of 12% per year (1% per month) to be repaid in 12 equal monthly payments.
a. What is the monthly payment?
b. What is the total amount of interest paid over the 12-month term of the loan?
6. You are taking out a $100000 mortgage...

2892 Words |
7 Pages

Share this Document

{"hostname":"studymode.com","essaysImgCdnUrl":"\/\/images-study.netdna-ssl.com\/pi\/","useDefaultThumbs":true,"defaultThumbImgs":["\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_1.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_2.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_3.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_4.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_5.png"],"thumb_default_size":"160x220","thumb_ac_size":"80x110","isPayOrJoin":false,"essayUpload":false,"site_id":1,"autoComplete":false,"isPremiumCountry":false,"userCountryCode":"US","logPixelPath":"\/\/www.smhpix.com\/pixel.gif","tracking_url":"\/\/www.smhpix.com\/pixel.gif","cookies":{"unlimitedBanner":"off"},"essay":{"essayId":33157114,"categoryName":"Periodicals","categoryParentId":"17","currentPage":1,"format":"text","pageMeta":{"text":{"startPage":1,"endPage":2,"pageRange":"1-2","totalPages":2}},"access":"premium","title":"Time Value of Money","additionalIds":[3,9,52,5],"additional":["Business \u0026 Economy","Entertainment","Business \u0026 Economy\/Organizations","Computer Science"],"loadedPages":{"html":[],"text":[1,2]}},"user":null,"canonicalUrl":"http:\/\/www.studymode.com\/essays\/Time-Value-Of-Money-134433.html","pagesPerLoad":50,"userType":"member_guest","ct":10,"ndocs":"1,500,000","pdocs":"6,000","cc":"10_PERCENT_1MO_AND_6MO","signUpUrl":"https:\/\/www.studymode.com\/signup\/","joinUrl":"https:\/\/www.studymode.com\/join","payPlanUrl":"\/checkout\/pay","upgradeUrl":"\/checkout\/upgrade","freeTrialUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fcheckout%2Fpay%2Ffree-trial\u0026bypassPaymentPage=1","showModal":"get-access","showModalUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fjoin","joinFreeUrl":"\/essays\/?newuser=1","siteId":1,"facebook":{"clientId":"306058689489023","version":"v2.8","language":"en_US"}}