Time Value of Money

Time Value of Money

Introduction

This paper is going to discuss key components of the time value of money (TVM) and identify some financial applications to commercial banks, credit card financial service companies, insurance companies, state government lotteries, and retirement plan financial service providers.

Time Value of Money

The Time Value of Money is “the idea that a dollar now is worth more than a dollar in the future, even after adjusting for inflation, because a dollar now can earn interest or other appreciation until the time the dollar in the future would be received,” (InvestorWords.com). The time value of money has many calculations. These calculations are future value of a single amount, present value of a single amount, future value of an annuity, present value of an annuity, annuity equaling a future value, annuity equaling a present value, determining the yield on an investment, less than annual compounding periods, and patterns of payment-deferred annuity.

Commercial Banks

Banks cannot operate without using the TVM. Commercial banks make business loans, accept deposits, and offer savings and checking accounts. Banks offer their customers accounts with a high interest rate to draw them in. The more customers the bank has, the more money they can make from them.

Credit Card Financial Service Companies

With credit card companies, they charge their customers whenever they have a balance. These credit card companies offer high credit limits to draw in their “victims”. Once the consumer is drawn in, making many charges on their account, they cannot make their full payment. When they cannot make their full payment, the credit card company charges them a finance charge and, simply put, makes money when the consumer is unable to afford to pay for their full balance.

Insurance Companies

Insurance companies are a prime example of TVM. With auto insurance companies, consumers spend money to make sure their car is safe. The insurance companies take the consumer’s money and invest it to increase their profits. The more customers the insurance companies have, the more they invest. Since the insurance companies know that not everyone will get into an accident or get sick, they can “bank” on the money they receive from their customers.

State Governments – Lotteries

Lotteries