Time Value Of Money
Time Value of Money Paper (TVM)
Jill Linhart
University of Phoenix
FIN 325
Monday, July 28, 2008
Money is worth less in the future than if a person would deposit funds into a savings account to allow the money to earn interest. In the future, interest cannot be earned instantly. This concept is known as the “Time Value of Money (TVM)”. This paper will look at the effects of the future value of money by interest rates, compounding interest, opportunity costs, annuities and the Rule of 72.
Simple interest has three components including the investment amount in dollars, the interest rates and the time period of the investment. In order to calculate the annual rates they must be adjusted between the timeframes (Breasley, Myers and Marcus; 2007).
Compound interest is the simple interest earned repeatedly over and over again during a set time period. The original investment, or base, amount is also referred to as the principal, earns interest which that interest then earns interest.
Some factors that are involved with interest rates include life span of borrower(s), the length of the loan, the size of the investment(s), and the feasibility of making investment (Sherrick, Ellinger, Lins; 2000; pg 4). It is good to receive compound interest although it is not good to pay the compound interest. The interest is calculated at the beginning interest as well as any interest being accumulated in the meantime. Unlike simple interst growing to what is known as a linear fashion, the compound interest has more of a dramatic growth.
Next, the present value (of a future payment received) is the amount a person would need to invest today to match that future payment. The present value’s impact on time value of money (TVM) is that the amount of the original investment can be increased due to the interest that will be earned over a period over the years (associatedcontent; 2007). An individual can estimate the...
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