- Trending Categories
Data Structure
Networking
RDBMS
Operating System
Java
iOS
HTML
CSS
Android
Python
C Programming
C++
C#
MongoDB
MySQL
Javascript
PHP
- Selected Reading
- UPSC IAS Exams Notes
- Developer's Best Practices
- Questions and Answers
- Effective Resume Writing
- HR Interview Questions
- Computer Glossary
- Who is Who
Explain the concept Time value of money in finance.
Time value of money tells, what would be the worth of value of your present money in future. In other words, it tells about the worth of today’s money in future. Money potential increases with time.
If you invest your today’s money, for which you will get interest, it will automatically increase the value of money. Factors like inflation and purchasing power are to be considered, while investing the money because both can erode the value.
Time value of money helps investors to take decisions about where to invest, when to invest. It also helps us to understand about interest, inflation, risk and return.
Components of time value of money are as follows −
Number of discounting/compounding periods.
Rate of interest.
Present value.
Future value.
Periodic payments.
Formula
Fv = Pv * [1 + (i/n)] ^ (n*t)
Where,
Fv = future value
Pv = present value
i = interest rate
t = number of years
n = compounding periods
Present value: It’s the present value of money you have in your pocket.
Future value: It’s the value of money that you have invested earlier and additional amount you have acquired by interest.
Techniques in time of value of money are mentioned below −
Compounding − It is the technique that represents the conversion of today’s money into future money by compounding factor/interest.
Vn=Vo*(1+k) ^n
Where, Vo= todays money, n = time of interval, Vn= future money, (1+k)= compounding factor, k = profitability rate
Discounting − It is the technique which is used to calculate the present value of future money.
Vo=Vn* (1/(1+k)^n)
Factors used to determine time value of money are as follows −
Inflation rate.
Interest rates.
Risk premium.
- Related Questions & Answers
- Explain compounding technique in the time value of money.
- What is meant by Time Preference or Time Value of Money?
- Explain the concept of amalgamation
- Explain types and characters of security finance in finance.
- Explain the concept of Regular expression.
- Explain the concept of trial balance
- Explain the concept of depreciation in accounting.
- Explain the concept of depletion in accounting.
- Explain the concept of delegates in C#
- Explain the concept of derivation in TOC
- Explain the concept of grammar in TOC
- Explain the concept of strings in TOC?
- Explain the concept of set in TOC?
- Explain the concept of Normalization in DBMS?
- Explain the concept of recoverability in DBMS