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Time Value of Money

Time Value of Money

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Published by: meetwithsanjay on Apr 10, 2010
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Time value of money - Wikipedia, the free encyclopediahttp://en.wikipedia.org/wiki/Time_value_of_money1 of 29/1/2005 6:58 PM
Time value of money
From Wikipedia, the free encyclopedia.A separate article treats the
time value of an option
.The
time value of money
(TVM) or the
present discounted value
is one of the basic concepts of finance. We know thatif we deposit money in a bank account we will receive interest. Because of this, we prefer to receive money today ratherthan the same amount in the future. Money we receive today is more valuable to us than money received in the future bythe amount of interest we can earn with the money. This is referred to as the time value or cash value of money. It is thechange in purchasing power of money over time.It also takes into account default risk and inflation. 100 monetary units today is a sure thing and can be enjoyed now. In 5years that money could be worthless or not returned to the investor.To adjust for this time value, we use two simple formulae. The present value formula is used to discount future moneystreams: that is, to convert future amounts to their equivalent present day amounts. The future value formula is used toconvert today's money into the equivalent amount at some time in the future (i.e., to compound money...either a lump sumor streams of payments).
Contents
1 Future value2 Present value3 Annuity4 Perpetuity5 See also6 External links
Future value
One hundred units invested today at a 5% per year interest rate will yield:after 1 year. So, the future value of 100 units in 1 year at 5% per year is 105 units. See future value for details.There is a separate formula to calculate Future Value of annuities:
Present value
One hundred units 1 year from now at 5% interest rate is today worth:

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