time value of money

Examples of time value of money in the following topics:

• Present Value and the Time Value of Money

  • The time value of money is the principle that a certain amount of money today has a different buying power (value) than in the future.
  • The time value of money is the principle that a certain amount of money today has a different buying power (value) than the same currency amount of money in the future.
  • The value of money at a future point of time would take account of interest earned or inflation accrued over a given period of time.
  • The return of $5 represents the time value of money over the one year interval .
  • The time value of money is the central concept in finance theory.

• Importance of the Time Value of Money

  • Time value of money is integral in making the best use of a financial player's limited funds.
  • The time value of money is a concept integral to all parts of business.
  • Option 2 may seem like the better bet because you get an extra $1,000,000, but the time value of money theory says that since some of the money is paid to you in the future, it is worth less.
  • In this formula, your deposit ($100) is PV, i is the interest rate (5% for Bank 1, 6% for Bank 2), t is time (5 years), and FV is the future value.
  • Describe why the time value of money is important when analyzing a potential project

• Defining the Time Value of Money

  • The Time Value of Money is the concept that money is worth more today that it is in the future.
  • One of the most fundamental concepts in finance is the Time Value of Money.
  • The $550 is called the Future Value (FV).
  • In this example money with a PV of $500 has a FV of $550.
  • Identify the variables that are used to calculate the time value of money

• Understanding the Cost of Money

  • The cost of money is the opportunity cost of holding money instead of investing it, depending on the rate of interest.
  • The concept of the cost of money has its basis, as does the subject of finance in general, in the time value of money.
  • The time value of money is the value of money, taking into consideration the interest earned over a given amount of time.
  • Furthermore, the time value of money is related to the concept of opportunity cost.
  • The cost of money is the opportunity cost of holding money in hands instead of investing it.

• Single-Period Investment

  • The time value of money framework says that money in the future is not worth as much as money in the present.
  • The value of the money today is called the present value (PV), and the value of the money in the future is called the future value (FV).
  • The amount of time is also represented by a variable: the number of periods (n).
  • One period could be any length of time, such as one day, one month, or one year, but it must be clearly defined, consistent with the time units in the interest rate, and constant throughout your calculations.
  • All of these variables are related through an equation that helps you find the PV of a single amount of money.

• The Relationship Between Present and Future Value

  • Present value (PV) and future value (FV) measure how much the value of money has changed over time.
  • The future value (FV) measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain interest rate, or more generally, rate of return.
  • The value does not include corrections for inflation or other factors that affect the true value of money in the future.
  • On the other hand, the present value (PV) is the value on a given date of a payment or series of payments made at other times.
  • If there are multiple payments, the PV is the sum of the present values of each payment and the FV is the sum of the future values of each payment.

• Functions of Money

  • The main functions of money are as a medium of exchange, a unit of account, and a store of value.
  • To act as a store of value, money must be able to be reliably saved, stored, and retrieved.
  • The value of the money must also remain stable over time.
  • Some have argued that inflation, by reducing the value of money, diminishes its ability to function as a store of value.
  • Money, such as the U.S. dollar, functions as a medium of exchange, a unit of account, and a store of value.

• The Definition of Money

  • The value of commodity money comes from the commodity out of which it is made.
  • Store of Value: To act as a store of value, money must be reliably saved, stored, and retrieved.
  • Additionally, the value of money must remain stable over time.
  • The value of commodity money is derived from the commodity out of which it is made.
  • Distinguish between the three main functions of money: a medium of exchange, a unit of account, and a store of value

• Types of Currency

  • Nearly all contemporary money systems are based on fiat money, which is modern currency that has value only by government order.
  • The other part of a nation's money supply consists of bank deposits (sometimes called deposit money), ownership of which can be transferred by means of checks, debit cards, or other forms of money transfer.
  • Usually (gold or silver) coins of intrinsic value (commodity money) have been the norm.
  • Fiat money is money that derives its value from government regulation or law.
  • Commodity money value comes from the commodity out of which it is made.

• Measuring the Money Supply

  • In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.
  • In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.
  • M2, a slightly "broader" measure includes all values incorporated under MI, in addition to assets held in savings accounts, certain time deposits and mutual funds balances.
  • V is the number of times per year each dollar is spent (velocity of money);
  • In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time.