2.

Time Value of Money

The concept of the time value of money (TVM) is foundational in financial management.
It is based on the idea 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
underlies the mechanics of finance, including banking, insurance, stock markets, and
personal investment planning.

TVM is explained through key concepts such as present value (PV), which is the current
value of a future amount of money, and future value (FV), which is the amount an
investment will grow to over a given period at a specified rate. The process of
determining the present value is called discounting, while the process of determining
the future value is known as compounding.

To calculate TVM, one must understand the variables involved: principal amount,
interest rate, number of compounding periods, and the time horizon of the investment.
This concept is applied in various financial decisions, including retirement planning, loan
amortization schedules, and investment in financial assets. The TVM formulae help in
comparing investment options and making informed financial decisions.