Time Value of Money

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 of the loan. In addition, the mortgage payments in buying a house depends on the time value of money, especially since the first several years of payments essentially go toward paying off interest with little impact on the principal. This was a huge concept for me, especially since I will be a first-time homeowner in the next