Time Value of Money

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Time Value of Money
Time value of money is the concept that the value of a dollar promised in the future is less than the value of a dollar to be received today. For different situations, financial reporting uses different measurements. Some of the applications of present value-based measurements to accounting topics are notes, leases, pensions and installment contracts, etc.

This article presents three exercises in order to develop students’ basic valuation concepts and skills with respect to time value of money. The first exercise introduces the importance and power of money’s time value. It uses a video accompanied with a couple of questions to attract students’ attention in time value of money and valuation material. Financial markets provided the money to fund history’s activities. Since operations in these markets mainly relied on the improvement of mathematics, capital markets cannot develop without the time value of money mathematics.

The second exercise attempts to help students discover relationships between cash flows, interest rates and investment values by four steps. Step 1 introduces basic time-value-of-money calculations and the way to use present value tables. The purpose of the second step is to associate investment purchase price with the present value of future cash flows. Next, step 3 introduces earnings calculation and amortization concepts. It teaches students how to calculate the interest earnings (or expense) from a series of bond cash flows and adjust the bond investment’s carrying value. After being familiar with the calculation of a bond’s cash flows, step 4 explains bonds and bond terminology. The concept includes face value, stated rate of interest, market rate of interest, par, discount and premium calculations.

The last exercise is the application of the time value of money – a retirement savings assignment. The assignment contains two parts: one is calculating future retirement asset values based on given retirement...
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