Time Value of Money
The time value of money serves as the foundation for all other notions in finance. It affects business finance, consumer finance and government finance. Time value of money results from the concept of interest. The idea is that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Time value of money can be illustrated by the fact that a dollar received today is worth more than a dollar received a year from now because today's dollar can be invested and earn interest as the year elapses. Implicit in any consideration of time value of money are the rate of interest and the period of compounding. This paper will list various financial applications of the time value of money and explain the components of the discount/interest rate.
Time Value of Money
The present value of a certain amount of money is greater than the present value of the right to receive the same amount of money in the future. Stanley Block and Geoffrey (2005), state a few essential rules relating to the time value of money: 1. Money has a time value associated with it and therefore a dollar received today is worth more than a dollar received tomorrow, 2. The future value and present value of a dollar are based on the number of periods involved and the going interest rate, and 3. Not only future value and present value be computed, but other factors suck as yield (rate of return) can be determined as well. The concept of the time value of money is essential, not only to large corporations that are looking to make large gains in profits,...
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What is economics? On the basis of most college courses in economics, it would be most appropriate to say something about supply and demand, those familiar curves that mysteriously set the price of goods and services. Close in relation to this are the "marginal propensity to consume" and various graphs that demonstrate the relationship between savings and investment, as mediated by the prevailing interest rates, or price of money. Contemporary economists are also fascinated by "the multiplier effect," the fact that the "effective money supply" is always much larger than its foundation in reserves, such as gold. The answer, in other words, is always that money lies at the heart of economics. Value equals price; that is, the value of anything is determined by market conditions. In thi...
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...
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.
The reason that our time capsule will have money is because later when it is like three hundred years from now the money that they have then could be different from what we have now or the money could be called
Money has evolved with the times and is a reflection of the progress of man. Early money was itself 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 in to a trust, “In God We Trust' it says on the back of the ten-dollar bill.” (The Ascent of Money, 27) Today money is faith in the person paying us and belief in the person issuing the money he uses or the institution that honors his money. This trust has no end it can be extended to a greater number of individuals.
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This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.