Time Value Of Money

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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.

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