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Money growth and inflation
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Time Value of Money
Believe it or not many people through out the years thought that by putting money to the side, under the mattress or, even in the cookie jar that eventually one day they would be rich. Well not to spoil the surprise but the years it would take to make one rich by those means are far off and nothing in between. This is where Time Value of Money comes in. Time Value of Money is the idea that a dollar today is worth more than a dollar in the future, even after the adjustments of inflation, interest rates, and appreciation until the time come for the dollar in the future to be received. Simply stated invest. There are a variety of financial applications of the time value of money. This paper will identify different financial application, and components of a discount and interest rate. The goal is to list various financial applications, and explain the components of discount and interest rates.
Financial Applications
The time value of money can be applied to many everyday financial decisions. Suppose a parent wants to set aside present funds for their child’s educational future. Several factors will impact the ability to yield a return, such as the number of periods involved and the applied interest rate. For this reason, the concept of the time value of money can be calculated by several financial applications. The financial applications consist of future values and present values, annuity, and yield of an investment, which will be discussed.
When considering the above example of setting aside funds for college, the parent may need to be aware of various future and present values of money. 50 years from now “tuition at an average private university (over four years) will go from $64,000 to $455,000” (Block, 2005, p. 244). Interest rates applied over time are a direct reflection and indicator of how much a dollar amount will be worth, which is also known as the future value of a single amount. The present value of a single amount has an indirect relationship with future value. Present value implies that a discount rate is in effect, since the amount is worth less in the present than in the future. Hence, what the parent puts in the college fund today will be worth less now, but in the future the amount will be worth more.
money.In the line “To be made of it !” Gioia uses a hyperbole by referring to rich people as being
People tend to try and predict what their future needs will be in order for them to be able to satisfy their current and future wants. The two-period model of intertemporal choice tries to interpret based on the current time period (e.g. this month) and a prediction of the future time period (e.g. next month) what consumers will be able to spend, borrow or save according to their levels of income and interest rates. In this assignment however we are mostly concerned on the changes of interest rate and specifically the impact an increase in the level of interest rates would have to consumers who are either savers or borrowers in the first period and how would that affect their consumption levels.
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...
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...
Although a college education grows more and more expensive every year. People begin to question whether college is a good idea to invest in or not. “As college costs continue to rise, students and their families are looking more carefully at what they are getting for their money. Increasingly, they are finding that the college experience falls short of their expectations”(Cooper. H Mary). Many people believe that the cost of a college degree has outstripped the value of a degree.Studies show that a college degree will increase your earning power. A lot of people say that a college degree now is worth what a high school diploma was wor...
The price of a four year institution has soared over three hundred percent in the past twenty-five years or so. We would have to factor in general inflation numbers in order to figure out the real significance. After that, we see that in those twenty-five years, tuition has risen at a rate of two to four times that of the national inflation. That has not been the case with college, however, as enrollments only continue to go up. Ultimately this means that families are paying for a luxury they can no longer afford with money they don’t have. Families are looking at an expense that is thirty-eight
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
The greatest question many have sought to answer is the creation vs. evolution debate. How did we get here? Were we created or did we evolve randomly? Are we the product of purposeful intelligence or are we the result of countless mistakes? Does it even matter? The story of money is similar to the story of humanity. Was money created or did it evolve. If it was created we can assume it will die. If money evolved then we can assume the future is unknown. In his book, The Ascent of Money a financial history of the world, Neil Ferguson historic analysis of money answers many of these questions. Ferguson believes money essentially mirrors mankind, magnifying back to us our progress, failures, values and weaknesses.” (The Ascent of Money, 358) The history of money shares many similarities to the history of man; Ferguson parallels between finance and Darwinism, illustrating the natural mechanism of our financial ecosystem that evolves, creates, competes, and dies.
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
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.
Financial Future: Where Will it be in 10 Years? Retrieved on November 20, 2013 from
Among all the programs available, I firmly believe that the Master in Finance program at Princeton University will be the ideal preparation for my career because of its strong emphasis on quantitative techniques with practical business problem solving. The core courses offered by the program will help me build concrete foundation in financial theories and computational methods; the elective courses, such as Forecasting and Time Series Analysis, will further enhance my modeling techniques for financial forecasting in a broader application. Besides excellent teaching fellows at Princeton University, the close personal attention from academic and career advisors will be invaluable to my professional growth. Furthermore, the small cla...
The future is always uncertain. However, having a financial plan for the future can save a person a lot of grief. More importantly, it can help tremendously for that young adult who is fresh out of college, and at the beginning stages of life; for the young adult who is preparing to attain his or her Doctorate, and will be living, most likely, completely on his or her own.
Our understanding and the concept of investment in behavioural finance combines economics and psychology to analyse how and why investors make final decision. As an investor one’s decision to invest is fully influence by different type of attitudes of behavioural and psychological ( Ricciardi & Simon, 2000). Yet, in order to maximize their financial goal, investors must have a good investment planning. Furthermore , to gain a good investment planning , there must be a good decision making among investors. They have to choose the right investment plan I order to manage the resources for different type of investments not only to gain profit wise but also to avoid the risk that occur from investment.
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.