Time Value of Money (TVM)
The Time Value of Money (TVM) is the concept that a sum of money is worth more today than the same sum in the future due to its earning potential over time. It is a fundamental principle in finance used to comp...
Time Value of Money (TVM)
It is a fundamental principle in finance used to compare investment options, evaluate loans, and assess financial decisions.
💡 Why It Matters:
Money today can be invested to earn interest, which increases its future value. If you receive money in the future, you're missing the opportunity to earn interest during the waiting period—this is known as opportunity cost.
🧮 Key TVM Concepts:
| Concept | Explanation |
|---|---|
| Present Value (PV) | The current value of a future amount of money, discounted at a certain rate. |
| Future Value (FV) | The value of a current amount after it earns interest over time. |
| Discount Rate | The interest rate used to calculate present value. |
| Compounding | Earning interest on both the initial principal and accumulated interest. |
| Annuity | A series of equal payments made at regular intervals (e.g., loan EMIs). |
🎯 Real-Life Applications:
- Investment decisions (e.g., evaluating stock or bond returns)
- Loan and mortgage calculations
- Retirement planning
- Business project valuations (NPV and IRR)
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