Time Value of Money

Time Value of Money

The time value of money serves as the foundation for all other notions in finance. It affects business finance, consumer finance and government finance. Time value of money results from the concept of interest. The idea is that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Time value of money can be illustrated by the fact that a dollar received today is worth more than a dollar received a year from now because today's dollar can be invested and earn interest as the year elapses. Implicit in any consideration of time value of money are the rate of interest and the period of compounding. This paper will list various financial applications of the time value of money and explain the components of the discount/interest rate.

Time Value of Money

The present value of a certain amount of money is greater than the present value of the right to receive the same amount of money in the future. Stanley Block and Geoffrey (2005), state a few essential rules relating to the time value of money: 1. Money has a time value associated with it and therefore a dollar received today is worth more than a dollar received tomorrow, 2. The future value and present value of a dollar are based on the number of periods involved and the going interest rate, and 3. Not only future value and present value be computed, but other factors suck as yield (rate of return) can be determined as well. The concept of the time value of money is essential, not only to large corporations that are looking to make large gains in profits, but to lenders that are expecting to receive the best interest rates on payments for their used capital. In addition, individual citizens research the best securities to invest in order to get the most return on their risk involved.

The financial applications that make up the time value