Time Value Flashcards
The Time Value of Money is the concept that
money is worth more today that it is in the future.
Being given $100 today is better than being given $100 in the future because
you don’t have to wait for your money.
The process of determining how much a future cash flow is worth today is called
discounting
Discounting
the process of determining how much money paid/received in the future is worth today. You discount future values of cash back to the present using the discount rate.
Single-period investments use
a specified way of calculating future and present value.
Multi-period investment:
an investment that takes place over more than one periods.
Simple interest increases the balance linearly, while compound interest increases it
exponentially
The Future Value can be calculated by knowing the
present value, interest rate, and number of periods, and plugging them into an equation.
The future value of a present value is calculated by
plugging the present value, interest rate, and number of periods into one of two equations.
Calculating FV is a matter of identifying
PV, i (or r), and t (or n), and then plugging them into the compound or simple interest formula.
Simple Interest Formula:
Simple interest is when interest is only paid on the amount you originally invested (the principal). You don’t earn interest on interest you previously earned.
The time value of money framework says that
money in the future is not worth as much as money in the present.
Future Value:
the value of an asset at a specific date. It measures the nominal future sum of money that a given sum of money is “worth” at a specified time in the future, assuming a certain interest rate, or more generally, rate of return, it is the present value multiplied by the accumulation function.
Present Value:
also known as present discounted value, is the value on a given date of a payment or series of payments made at other times. If the payments are in the future, they are discounted to reflect the time value of money and other factors such as investment risk. If they are in the past, their value is correspondingly enhanced to reflect that those payments have been (or could have been) earning interest in the intervening time. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful “like-to-like” basis.
Time period assumption:
Business profit or losses are measured on a timely basis.