Time Value Of Money

741 Words2 Pages
bulb-icon

Recommended: Factors affecting time value of money

Time Value of Money

"Money has a time value associated with it and therefore a dollar received today is worth more than a dollar to be received in the future" (Block, Hirt, 2005). The time value of money may be based on the concept that one would prefer to receive a fixed payment today rather than the same fixed payment at a future date. This paper discusses some of the key components of time value of money and identifies the application of time value of money in various businesses.

Commercial banks use various time value of money formulas daily. One example of the application of time value of money in commercial banks is through mortgages. Using the formula for present value of an annuity, a bank will solve the formula to determine the monthly payment amount, the borrower’s monthly mortgage payment.

Credit card financial service companies are commonly known to issue private student loans. Therefore, credit card companies would use the time value of money to determine loan payment schedules and the number that students most fear, the ending balance, the future value of the loan. Credit card companies would use the formula for present value of an annuity to determine the payment schedule, and they would use the formula for future value of an annuity to determine how much money the student will end up paying the credit card company at the end of student loan.

Insurance companies also use time value of money. A structured settlement is one example. If a person owes $100,000 payable in $20,000 increments over the next five years, the present value of the settlement is less than $100,000. Therefore, the person would be better off paying the lump sum now if possible.

The same time value of money can be seen in state governments and lotteries. For example, a person wins a lottery worth one million dollars. This person is given three options, and each option has a different fee attached to it. The first option is to receive $20,000 a year for the next 50 years. The second option is to receive a lump sum now of one million dollars. This option has the largest fee. The third option is to receive half the money now and the other half over the next 25 years. One would use the time value of money to determine the better deal.

Time value of money can also be seen with retirement plan financial service providers.

Show More
Related

  • Analysis Of Money By Dana Gioia

    438 Words  | 1 Pages

    money.In the line “To be made of it !” Gioia uses a hyperbole by referring to rich people as being

    Read More

  • Ethics Case 6-4: Ethics Case report for Rate of Return

    965 Words  | 2 Pages

    In this case we are considering the time value of money in terms of growth where industry standards typically expect rates to be stated in annual terms.

    Read More

  • TVM

    591 Words  | 2 Pages

    Time value of money (TVM) is a monetary concept that is very important to all parts of the financial world. This concept basically says that $100 today is worth more than $100 a year from now (or anytime in the future). Also, an individual should earn some value of compensation for not spending their money. This compensation is essentially called the interest that will be earned on the initial cash. What about when an individual opts to receive money in the future rather than today? That can lead to problems. This is because they are taking a gamble by loaning money- since there is almost always risk in loaning money. A couple of these risks include inflation and default risk. Default risk means that the person who borrowed the money does not repay the money to the person that loaned it. Inflation means that the general prices of products will rise. How does all this work? In theory the person that gets the $100 today could invest it, even at a very low annual percentage rate (APR), and still come out ahead. If they invest it at 2% APR, they would have $102 at the end of one year. Th...

    Read More

  • College Costs and Debt

    948 Words  | 2 Pages

    With student debt at an all-time high, parents want loans to be a last resort when in need of money for their child’s college tuition. “Money is a major concern for many high school students (and their parents) who are weighing college options” (Austin). Debt is a serious matter and is a hard thing to pay back. Another controversy with college tuition is not every person gets to have the chance to attend college. With colleges having a monthly payment plan, there could be a possibility that more students would have the ability to experience college and more would graduate with less debt. Rather than the necessity of having the whole college tuition for that school year, students would b...

    Read More

  • Discounted Cash Flow Valuation

    1092 Words  | 3 Pages

    The purpose of this paper is to give a clear understanding of discounted cash flow valuation. The paper will explain what a discounted cash flow valuation is and its importance in financial business decisions regarding investment strategies. This paper will give a detailed discussion about discounted valuations for both present and future multiple cash flows with respect to even and uneven schedules using clear step-by-step examples. Also included will be some advantages and disadvantages in using the discounted cash flow valuation method for corporate business. Finally, the paper will give a summary of important highlights discussed in the body of the paper.

    Read More

  • Total Cost Of Ownership

    1958 Words  | 4 Pages

    In the case of making a TCO model, also opportunity costs and present value are taken into account. Taking present value into account means; making a difference between future and past cash outlays. This way the time value of money can be considered when comparing the different alternatives. Opportunity costs finally can be described as:

    Read More

  • The Ascent of Money Has Lead to the Ascent of Man

    1287 Words  | 3 Pages

    Money has evolved with the times and is a reflection of the progress of man. Early money was a physical commodity, grain, gold or silver. During the vital stage, more symbolic forms of money such as certificates of deposit, bank notes, checks, letters of credit, bonds and other forms of negotiable securities came into prominence. Social development transformed money into a trust, “In God We Trust' it says on the back of the ten-dollar bill.” (The Ascent of Money, 27)

    Read More

  • Review of Funky Business by Jonas Ridderstråle

    1938 Words  | 4 Pages

    This is followed with the “real-time society”. Nowadays time plays a much more important role and we live in a generation of speed. Nobody wants to wait for their products and therefore companies want to under quote when it comes to time. “In the real-time economy prices are set second by second, companies compete on how fast they can be to develop, make and launch products.

    Read More

  • Macroeconomic Impact on Business Operations

    1602 Words  | 4 Pages

    Money supply is the availability of money in the hands of the public (economy) that can be used to purchase goods, services and securities. In macroeconomics, the price of money is equivalent to the rate of interest. There's an inverse relationship between money supply and interest rates. As money supply increases, interest will decrease. On the other hand, interest will increases as money supply decreases. It is very important to understand that the economy works at market equilibrium. There are several factors affecting money supply; and these contributing factors will be the main focus of this paper. Understanding the basic principle on money supply is imperative to have a good grasp on the macroeconomic impact of money supply on business operations.

    Read More

  • Green Affordable Housing

    1511 Words  | 4 Pages

    A traditional analysis gives a mistakenly high value to dollars in the future, money in the future is given the same value as money today; but in reality, money in the fu...

    Read More

  • Time Value Of Money

    1709 Words  | 4 Pages

    One might know that time is one of the most valuable assets in our lives. In the financial world the value of money is linked to time, primarily because investors expect progressive returns on their cash over periods of time, and they always compare the return from certain investments with the going or average returns in the market. Inflation on other hand erodes the purchasing power of money causing future value of one dollar to be less than the present value of a dollar. This paper will examine time value of money and the applications that determine successes or failures. An examination of the different vehicles that can be used to generate financial security for corporations and individuals will be provided. After defining the applications that generalize time value of money, an explanation will be offered regarding the components of interest rates by expanding on the concept that interest rate equates the future value of money with present value.

    Read More

  • Bonds and The Bond Market

    3294 Words  | 7 Pages

    amount, in percentages, which is paid at regular intervals until some future specified time ( the

    Read More

  • The History of Money and Banking

    1178 Words  | 3 Pages

    The invention of money was a major improvement in peoples’ lives. In the past, people usually had to travel all day to find the person who is willing to exchange their goods. In addition, the goods people want to exchange did not have the standard value of measurement. This led to unequal exchanges. Furthermore, it is not convenient to carry heavy goods from one place to another for an exchange. To solve these issues, money will be the only solution. Later, people tend to develop money from cowry shells to credit cards for the convenience and to improve their society.

    Read More

  • Money Is The Only Thing That Really Motivates People

    1868 Words  | 4 Pages

    As the quotation above says, is money society¡¦s new god? If so, can other values such as freedom, love, achievement or even motivation also be bought? This is precisely the topic of the paper. All of these things can be pointed back to money and see how people treat it today. Besides discussing the real functions of money, this paper will also attempt to answer not just the questions above but also investigate whether money is the only thing that really motivates people today.

    Read More

  • The Future of Our Money

    2427 Words  | 5 Pages

    The invention of money is perhaps one of the greatest achievements of human civilization. From the very beginning of society, people have used money to circumvent the difficulties of bartering and to foster trade and commerce. Since then, money has come a long way. No longer do we need to rely on silver coins, cocoa beans, or even anything of intrinsic value to conduct our business; today, we use paper currency, which is convenient and easy to carry around. But slowly, we are moving into the digital age of money, an age in which less of our money is actually tangible and more of it is just data on a computer server.

    Read More

More about Time Value Of Money

Open Document