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Time Value Of Money Essay

384 words - 2 pages

Time value of money is the concept that shows the value of money which decreases day by day. There are so many factors which contribute to the time value of money such as inflation and increasing interest rates. The time value of money is sued to solve the problems which are related to the loans, mortgage, leases, saving and annuities. In the investment, time value of money is used to compare the alternatives of investment (Weil, 1990). The time value of money is based on the concept that money ...view middle of the document...

Then it can be said that the future value of the dollar is $1.06 given an interest rate and the present value of the $1.06 it is expected to receive in one year is only $1 (Drake, & Fabozzi, 2009). Interest rates and series of payments are included in the transactions. If the time value money is not used in past then there may be risk in the transaction. This helps in reaching at the comparable value of the money.
that anyone has today is worth more than the expectation which one will receive in the future.
The money which is hold in the present is worth more because it can be invested and can earn the interest. For example, one can invest the dollar for one year at a 6% annual interest rate and accrue &1.06 at the end of the year. Then it can be said that the future value of the dollar is $1.06 given an interest rate and the present value of the $1.06 it is expected to receive in one year is only $1 (Drake, & Fabozzi, 2009). Interest rates and series of payments are included in the transactions. If the time value money is not used in past then there may be risk in the transaction. This helps in reaching at the comparable value of the money.

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