Time Value of Money .

• Time Value of Money

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Rate of return - Time value of money

1 time value of money



1 Investments generate cash flow to the investor to compensate the

investor for the time value of money.



1 The time value of money is reflected in the interest rates that banks offer for deposits, and also in the interest

rates that banks charge for loans such as home mortgages. The “risk-free” rate is the rate on U.S. Treasury bills, because this is the highest rate

available without risking capital.


Valuation (finance) - Business valuation

1 This method estimates the value of an asset based on its expected future cash flows,

which are discounted to the present (i.e., the present value). This concept of discounting

future money is commonly known as the time value of money. For instance, an asset that matures and pays $1 in one year is worth

less than $1 today. The size of the discount is based on an opportunity cost of capital and it

is expressed as a percentage or discount window|discount rate.


Finance

1 'Finance' is the allocation of assets and Liability (financial accounting)|liabilities over time under

conditions of certainty and uncertainty. A key point in finance is the time value of money, which states that a unit of currency today is worth more than the same unit of currency

tomorrow. Finance aims to price assets based on their risk level, and expected rate of return. Finance can be broken into three different sub categories: public finance, corporate finance

and personal finance.


Levelised energy cost - Cost factors

1 To evaluate the total cost of production of electricity, the streams

of costs are converted to a net present value using the time value of money. These costs are all brought

together using discounted cash flow.


Mortgage loan - Basic concepts and legal regulation

1 Mortgage loans are generally structured as long-term loans, the periodic payments for which are

similar to an Annuity (finance theory)|annuity and calculated

according to the time value of money formulae


Mortgage loan - Capital and interest

1 A mortgage is a form of Annuity (finance theory)|annuity (from the perspective of the lender), and the

calculation of the periodic payments is based on the time value of money

formulas


Term life insurance - Level term life insurance

1 In this form, the premium paid each year remains the same for the duration of the

contract. This cost is based on the summed cost of each year's annual

renewable term rates, with a time value of money adjustment made by the insurer. Thus, the longer the term the premium is

level for, the higher the premium, because the older, more expensive to insure years

are averaged into the premium.


Outline of finance - Fundamental financial concepts

1 ** Time value of money


Interest - Types of interest

1 In this case, the time value of money is not factored in. The steady

payments have an additional cost that needs to be considered when

comparing loans. For example, given a $100 principal:


Interest - Types of interest

1 #When rates are the same but the periods are different a direct

comparison is inaccurate because of the time value of money. Paying $3

every six months costs more than $6 paid at year end so, the 6% bond

cannot be 'equated' to the 6% GIC.


Cost-benefit analysis

1 CBA is related to, but distinct from cost-effectiveness analysis. In CBA, benefits and costs are expressed in

monetary terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur

at different points in time) are expressed on a common basis in terms of their net present value.


Cost-benefit analysis - Time and Discounting

1 CBA usually tries to put all relevant costs and benefits on a common temporal footing using time value of money calculations. This is often done by

converting the future expected streams of costs and benefits into a present value amount using a discount rate. Empirical

studies and a technical framework suggest that in reality, people do

discount the future like this.


Net present value

1 NPV is a central tool in discounted cash flow (DCF) analysis and is a

standard method for using the time value of money to appraise long-term

projects


Outline of economics - General economic concepts

1 **Time value of money


Accelerated depreciation - Example

1 To compare these two (simplified) cases, the company pays $200 in

taxes in both instances. In the second case, it has deferred taxes to a much later period. The deferral of taxes to a later period is favorable

according to the time value of money principle.


Corporate finance - Investment and project valuation

1 Such future cash flows are then discounts and allowances|discounted to determine their present value (see

Time value of money)


Corporate finance - Working capital

1 In addition to time horizon, working capital management differs from capital budgeting in terms of time value of money|discounting and

profitability considerations; they are also reversible to some extent


Financial

1 A key point in finance is the time value of money, which states that one unit of currency today is worth

more than one unit of currency tomorrow


Time

1 Time is also of significant social importance, having economic value

(Time value of money|time is money) as well as personal value, due to an

awareness of the limited time in each day and in life expectancy|human life

spans.


Unfree labour - Payment for unfree labour

1 By contrast, according to the subjective theory of value (as used

by Neoclassical economics|neoclassical economists), the wages

offered necessarily represent the Marginal utility|marginal wealth

generated by the labour, and any profit (or loss) is due to other inputs provided, such as arbitrage, interest|

time value of money, or risk.https://store.theartofservice.com/the-time-value-of-money-toolkit.html

Chartered Financial Analyst - Quantitative methods

1 This topic area is dominated by statistics: the topics are fairly broad, covering

probability theory, hypothesis testing, (multi-variate) regression, and time-series analysis. Other topics include time value of money—incorporating basic valuation and yield and return calculations—and

Modern_Portfolio_Theory#Risk_and_expected_return|portfolio-related calculations.


Financing

1 A key point in finance is the time value of money, which states that one unit of currency today is worth

more than one unit of currency tomorrow


Discounting

1 This fact is directly tied into the Time Value of Money and its calculations.


Discounting

1 Therefore, the Discount Yield, which is predetermined by a related return on investment that is found in the financial markets, is what is used within the Time Value of Money calculations to determine the

Discount required to delay payment of a financial liability for a given

period of time.


Master of Science in Finance - Structure

1 These topics are generally preceded by more fundamental coursework in economics, (managerial accounting|

managerial) accounting, and Quantitative research#Quantitative

methods|quantitative methods (usually time value of money and Statistics|introductory statistics)


Financial capital - Three concepts of capital maintenance authorized in IFRS

1 Financial capital is provided by lenders for a price: interest. Also see

time value of money for a more detailed description of how financial

capital may be analyzed.


Working capital management - Investment and project valuation

1 Such future cash flows are then discounts and allowances|discounted to determine their present value (see

Time value of money)


Best alternative to a negotiated agreement

1 Care should be taken, however, to ensure that deals are accurately valued, taking into account all

considerations, such as relationship value, time value of money and the likelihood that the other party will live up to their side of the bargain


Time value of money

1 The time value of money is the central concept in 'finance theory.' However, the explanation of the

concept typically looks at the impact of interest and assumes, for

simplicity, that inflation is neutral.


Time value of money

1 For example, £100 of today's money invested for one year and earning 5% interest will be worth

£105 after one year. Therefore, £100 paid now or £105 paid exactly one year from now both have the same value to the recipient who assumes 5% interest; using 'time value of money terminology', £100 invested for one year at 5% interest has a

future value of £105.http://www.investopedia.com/articles/03/082703.asp This notion dates at least to Martín de

Azpilcueta (1491–1586) of the School of Salamanca.


Time value of money

1 All of the standard calculations for time value of money derive from the most basic algebraic expression for the present value of a future sum,

Discounting|discounted to the present by an amount equal to the

time value of money. For example, a sum of FV to be received in one year is discounted (at the rate of interest 'r') to give a sum of PV at present:

PV = FV − r'·'PV = FV/(1+r).https://store.theartofservice.com/the-time-value-of-money-toolkit.html

Time value of money

1 Some standard calculations based on the time value of

money are:


Time value of money - Present value of a future sum

1 The present value formula is the core formula for the time value of money; each of the other formulae is derived from this formula. For example, the

annuity formula is the sum of a series of present value calculations.



1 The standard technique tool in the analysis of ODEs is the use of

Green's functions, from which other solutions can be built. In terms of time value of money, the Green's

function (for the time value ODE) is the value of a bond paying £1 at a single point in time u – the value of any other stream of cash flows can

then be obtained by taking combinations of this basic cash flow.

In mathematical terms, this instantaneous cash flow is modeled

as a Dirac delta function \delta_u(t) := \delta(t-u).



1 This formalizes time value of money to future values of cash flows with varying discount rates, and is the

basis of many formulas in financial mathematics, such as the Black–

Scholes formula with Black–Scholes#Interest rate curve|varying

interest rates.


Anarchism and anarcho-capitalism - Background

1 Tucker says interest rates are ultimately determined by the time value of money, rather than the

supply of money and that interest/profit would still exist in a

free banking environment


Certified in Financial Forensics - Specialized forensic knowledge

1 #Economic damages ‐ businesses: Lost profits, Lost value, Extra costs,

Lost cash flow, Mitigation, Restitution, Interest/time value of money, Out of pocket, Rescission,

Unjust enrichment, Determination of Present Value date of damages,

Methods of determining


Certified in Financial Forensics - Specialized forensic knowledge

1 #Economic damages ‐ individuals: Lost earnings, Medical expenses,

Burial costs, Lost household services, Cost of repairing or replacing

property, Cost of loss of use of property, Interest/time value of

money


Texas Instruments Business Analyst

1 BA calculators provide time value of money functions and are widely used

in accounting and other financial applications


Fundamental analysis - Procedures

1 The simple model commonly used is the P/E ratio (price-to-earnings ratio). Implicit in this model of a perpetual

annuity (Time value of money) is that the 'flip' of the P/E is the discount rate appropriate to the risk of the

business. The multiple accepted is adjusted for expected growth (that is

not built into the model).


Discounted cash flow

1 In finance, 'discounted cash flow' ('DCF') analysis is a method of valuing a project, company, or financial asset|asset using the

concepts of the time value of money


Discounted cash flow - Discount rate

1 # Time value of money (risk-free rate) – according to the theory of time preference, investors would

rather have cash immediately than having to wait and must therefore be compensated by paying for the delay


Valuation using multiples - Determining current company value

1 Calculate the current value of the future company value by multiplying

the future business value with the discount factor. This is known as the

time value of money.


Michael Klausner - Key Works

1 *Michael Klausner, When Time Isn't Money: Foundation Payouts and the

Time Value of Money, 41 Exempt Organization Tax Review 421-428

(September 2003).


Engineering economics

1 Considering the time value of money is central to most engineering

economic analyses. Cash flows are Discounting|discounted using an

interest rate, i, except in the most basic economic studies.


Annuity (finance theory) - Valuation

1 The valuation of an annuity entails concepts such as time value of money, interest rate, and future

value..


Predatory lending - Underlying issues

1 * 'Financial education': Many observers feel that competition in the markets served by what critics

describe as predatory lenders is not affected by price because the

targeted consumers are completely uneducated about the time value of money and the concept of Annual

percentage rate, a different measure of price than what many are used to


Opportunity management - Opportunity Management and Project Management

1 Opportunity management determines the payback of the project within the initiation

stage. Although the payback period is defined by Kerzner as the least precise of all capital

budgeting methods because the calculations are in dollars and cannot adjusted for the time value

of money.ibid By establishing the payback period within the opportunity management process, project managers may continually

assess the project expenditures and re-evaluate the payback period on an ongoing basis.


Pay Related Social Insurance - Tax credits

1 The PAYE tax credit, which is also €1,650, is awarded to employees and others who pay tax under the Pay as

you earn system (further details below), to compensate them for the time value of money effect; their tax

is deducted from their incomes during the year, whereas the self-employed pay near the end of the

yearhttps://store.theartofservice.com/the-time-value-of-money-toolkit.html

Farm (revenue leasing) - Valuation of a farm

1 Then a discount for a risk element is deducted with a further discount deducted for the time value of

money


History of United States debt-ceiling increases - Historical debt ceiling levels

1 1. The figures are unadjusted for the time value of money, such as interest

and inflation and the size of the economy that generated a debt


Binary economics - Overview

1 Another contrast is that, in evidence-based economics, interest (as distinct from

administration cost) is practically always necessary; in Binary Economics theory it

isn't (certainly where the development and spreading of productive capacity is

concerned).Rodney Shakespeare (2007) op. cit. Conventional economics accounts

for the observed time value of money, whereas binary economics does not.


Present value

1 The present value is always less than or equal to the future value because money has interest-earning potential,

a characteristic referred to as the time value of money


Present value - Interest Rates

1 Interest represents the time value of money, and can be thought of as

rent that is required of a borrower in order to use money from a lender


School of Salamanca - Interest on money

1 Martín de Azpilcueta also considered the effect of time, formulating the

time value of money. All things being equal, one would prefer to receive a given good now rather than in the

future. This time preference|preference indicates greater value. Interest, under this theory, is the payment for the time the loaning

individual is deprived of the money.https://store.theartofservice.com/the-time-value-of-money-toolkit.html

Islamic banking - Introduction

1 The word riba means interest, usury, excess, increase or addition, which

according to Shariah terminology, implies any excess compensation without due consideration (consideration does not

include time value of money). The definition of riba in classical Fiqh|Islamic

jurisprudence was surplus value without counterpart, or to ensure equivalency in real value, and that numerical value was

immaterial.https://store.theartofservice.com/the-time-value-of-money-toolkit.html

Islamic banking - Murâbaḥah

1 The bank is not compensated for the time value of money outside of the

contracted term (i.e., the bank cannot charge additional profit on

late payments); however, the asset remains as a mortgage with the bank

until the default is settled.


Islamic banking - Qard hassan/ Qardul hassan (good loan/benevolent loan)

1 Some Muslims consider this to be the only type of loan that does not

violate the prohibition on 'riba, for it alone is a loan that truly does not

compensate the creditor for the time value of

money.http://www.irfi.org/articles/articles_301_350/is_islamic_banking_isla

mic.htm


Islamic banking - Controversy

1 Some Islamic banks charge for the time value of money, the common

economic definition of interest (riba). These institutions are criticized in

some quarters of the Muslim community for their lack of strict

adherence to Sharia.


Amortizing loan

1 Each payment to the lender will consist of a portion of interest and a portion of principal. Mortgage loans are typically amortizing loans. The calculations for an amortizing loan are those of an Annuity (finance

theory)|annuity using the time value of money formulas, and can be done

using an amortization calculator.


Continuous compounding - Simplified calculation

1 Formulae are presented in greater detail at time

value of money.


Film finance - About

1 For the investor who pays for part of the negative costs, the time value of money is

important


Floating rate note - Simple margin

1 A more complex measure of the 'effective spread' is a 'discount

margin', which takes into account the time value of money of the FRN cash flows. The formula for the calculation

of the 'discount margin' is more complex and its calculation generally

requires a financial calculator or a computer.


Coupon (bond) - Overview

1 Normally, to compensate the bondholder for the time value of

money, the price of a zero-coupon bond will always be less than its face

value on any date before the maturity date


Payback period

1 The time value of money is not taken into account


Payback period - Purpose

1 Whilst the time value of money can be rectified by applying a weighted

average cost of capital discount, it is generally agreed that this tool for

investment decisions should not be used in isolation


Perpetuities

1 Real estate and preferred stock are among some types of investments

that affect the results of a perpetuity, and prices can be established using

techniques for valuing a perpetuity.http://www.investopedia.c

om/terms/p/perpetuity.asp Perpetuities are but one of the time value of money methods for valuing

financial assetshttps://store.theartofservice.com/the-time-value-of-money-toolkit.html

Murabaha

1 Whilst it can be wikt:justified|justified to charge an additional margin to the customer to reflect the time value of money in terms of actual payment

not being received from the customer at time zero, the bank can

only impose penalties for late payment by agreeing to purify them

by donating them to charity.


Credit card interest - Adjusted balance

1 The balance at the end of the billing cycle is multiplied by a factor in

order to give the interest charge. This can result in an actual interest

rate lower or higher than the expected one, since it does not take

into account the average daily balance, that is, the time value of money actually lent by the bank. It does, however, take into account money that is left lent out over

several months.


Risk-based pricing

1 The interest rate on a loan is determined not only by the time value of money, but also by the

lender's estimate of the probability that the borrower will default on the loan.http://www.federalreserve.gov/newsevents/press/bcreg/20080508a.htm A borrower who the lender thinks is less likely to default will be offered

a better (lower) interest ratehttps://store.theartofservice.com/the-time-value-of-money-toolkit.html

Real interest rate - Risks

1 In economics and finance, an individual who lends money for

repayment at a later point in time expects to be compensated for the time value of money, or not having

the use of that money while it is lent


Real interest rate - Risks

1 : 'Real interest rates' include only the systematic and regulatory risks and

are meant to measure the time value of money.


Share price - History

1 Following this, the next stage was the use of discounted cash flows,

based on the time value of money, to estimate the intrinsic value of stock.


Zero-coupon bond

1 Note that this definition assumes a positive time

value of money


Return of capital - Time value of money

1 *If you consider that depreciation is an allocation of the original cost of

the asset, then you must agree that time value of money considerations make the original cost HIGHER than

the sum of the subsequent ROC expenses not realized until many

years in the future.


Revlon Moment - Judgment

1 *As to the former, the Court noted that the price ultimately offered by

Forstmann was not materially better than what was already on the table

from Pantry Pride once the time value of money was taken into

account.(Acceptance of the Pantry Pride tender offer would have

resulted in immediate payment to the Revlon stockholders


Accounting rate of return

1 [http://www.answers.com/topic/accounting-rate-of-return-arr

Accounting Rate of Return - ARR] The ratio does not take into account the

concept of time value of money


Cars (disambiguation) - Economics and finance

1 * Cumulative average return, a financial concept related to the time value of money


Sukuk - Controversy

1 Conservative scholars do not believe that this is effective, citing the fact

that a Sukuk effectively requires payment for the Time value of money|time-value of money


Martín de Azpilcueta - Time value of money

1 He allegedly invented the mathematical

concept of the time value of money.


Finance & Commerce

1 A key point in finance is the time value of money, which states that purchasing power of one unit of

currency can vary over time


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Time Value of Money .

Documents

time value of money

net present value

moneyt loan capital

corporate finance

public finance

personal finance

expected rate of return

summed cost