Time Value Of Money Flashcards, test questions and answers

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What is Time Value Of Money?

Time Value of Money (TVM) is an important concept in finance that helps illustrate how the value of money changes over time. TVM states that a dollar today is worth more than a dollar tomorrow because inflation, opportunity costs and other factors can reduce the future purchasing power of money. This means that it’s beneficial to invest money now so it can increase its value over time, rather than waiting until later when it may be worth less. The most basic formula for calculating Time Value of Money is by using the present value formula: PV=FV/(1+r)^t where PV stands for present value, FV stands for future value, r represents the interest rate per period and t signifies number of periods. In this formula, present value indicates how much money we would have if we invested our funds now instead of at some point in the future; whereas future value is used to determine what amount we will have after investing our funds at a given interest rate over a specific length of time. The higher the interest rate and longer investment horizon are both associated with higher returns. By taking advantage of Time Value Of Money principles such as compounding or reinvesting profits back into investments sooner rather than later can help maximize potential gains while reducing losses due to inflation or market volatility. Additionally, investors should consider tax implications when making decisions related to their investments since taxes can significantly affect returns over long-term horizons – something which must also be taken into account when considering any investment decision – however understanding these concepts will ultimately aid individuals in achieving their financial goals faster than they otherwise might have been able to do so without knowing about this concept.