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Time Value of Money

Definition of Time Value of Money

Time value of money can be interpreted in mathematical calculation, which solves one of several variables in a financial problems, a typical example of variable would be a balance (the mentioned facts in a balance are the real and nominal value of a debt or a financial asset in terms of monetary units), a periodic rate of interest, the period numbers and a series of cash flows.

In other words, Time value of money is the calculative idea which tells that the present money is more worthy than the same amount in the future due depending on the potential of its earning capacity. Finance carries the core concept that provides the idea that provided money can interest, any amount of money is worth more the sooner it is received.

 

Books on Time Value of Money

Book 1:

Foundations and Applications of the Time Value of Money By Pamela Peterson Drake, Frank J. Fabozzi (published by John Wiley & Sons, 2009)

Book 2:

Using Financial Calculators for Time Value of Money Calculations By Johan Marx (published by Pearson South Africa, 2009)

How Time Value of Money works?

Here are a few of practical examples, with which the notion of Time value of money can be clarified, here are two of examples are discussed below,

  • For example, suppose a investment worth of $100 with 5% interest for one year, after completing the whole one year the money will reach $105 ($100 multiplied by 1.05), when coming in opposite direction $100 received one year from now is only worth $95.24 today, ($100 divided by 1.05), with the assumption of 5% interest.
  • Let’s say a person is given choice of $4000 in recent or $5000 in near four years? What do you think what would the choice of the person, when the person compare the two numbers, he would be lenient towards $5,000 rather than $4,000, because the money he would receive in four years, is more the value which is recent time.

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