Time Value
The Present and Future Price of Money
Trident University International
FIN 501
Module 2: Case Assignment
Dr. John Halstead
One of the most important concepts about saving and investing is the time value of money. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. This means money paid out or received in the future is not equivalent to money paid out or received today because inflation erodes money’s buying power. Basically, the power of time is on a person’s side and the premise that cash in hand today is more valuable than the same amount in the future due to its capability of earning interest. There are three factors affecting how much an investment will grow: time, money, and interest rate. Time Value of Money is a concept that is very important in financial management. It affects business, personal, and government finance (Harvey, 2012) Within this paper we will discuss the definition of Time Value of Money and identifies the importance of financial managers understanding the concept.
Time, Money and Interest Rates Time has an important impact on the future value of money. Time is referred to as “N”, or “number,” and signifies the number of times something happens to your money. The earlier an individual invests, the more time their investment has to compound interest and increase in value. The effects of time on the value of money need to be taken into account when assessing investments.
Investments (Money) with interest rates compounding frequently will yield higher returns. The higher the interest rate, the more money an individual will earn. However, and individual must understand an investment with a higher interest rate generally has a greater risk. Risk is the uncertainty the yield on an investment will deviate from what is expected. Generally, having a savings or investment plan with a fixed interest
Trident University International
FIN 501
Module 2: Case Assignment
Dr. John Halstead
One of the most important concepts about saving and investing is the time value of money. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. This means money paid out or received in the future is not equivalent to money paid out or received today because inflation erodes money’s buying power. Basically, the power of time is on a person’s side and the premise that cash in hand today is more valuable than the same amount in the future due to its capability of earning interest. There are three factors affecting how much an investment will grow: time, money, and interest rate. Time Value of Money is a concept that is very important in financial management. It affects business, personal, and government finance (Harvey, 2012) Within this paper we will discuss the definition of Time Value of Money and identifies the importance of financial managers understanding the concept.
Time, Money and Interest Rates Time has an important impact on the future value of money. Time is referred to as “N”, or “number,” and signifies the number of times something happens to your money. The earlier an individual invests, the more time their investment has to compound interest and increase in value. The effects of time on the value of money need to be taken into account when assessing investments.
Investments (Money) with interest rates compounding frequently will yield higher returns. The higher the interest rate, the more money an individual will earn. However, and individual must understand an investment with a higher interest rate generally has a greater risk. Risk is the uncertainty the yield on an investment will deviate from what is expected. Generally, having a savings or investment plan with a fixed interest
References: Biger, N. (2008). Explanation of present values and net present values. Harvey, C. R. (2012). Time Value of Money. Retrieved January 16, 2013, from The Free Dictionary: http://financial-dictionary.thefreedictionary.com/Time+value+of+money McCracken, M., (n.d.) The time value of money. Retrieved January 2014 from http://www.teachmefinance.com/timevalueofmoney.html Time Value of Money Overview. (n.d.) Retrieved January 17, 2013, from University of West Florida: http://uwf.edu/rconstand/fin4424web/T2-TimeValue/T2-TimeValuePO1.htm