The Time Value of Money

Paper Summary:

This document discusses the time value of money (TVM) concept which is a foundational concept in all financial disciplines. It further discusses the impact that TVM has on annuities and how they are valued through the rule of 72 which is also used to figure most other types of interest bearing accounts to determine rates of return. Finally, the paper examines the concept of opportunity cost because understanding the cost associated with not doing something in lieu of doing something else is important in determining which strategy to adopt.

From the Paper:

"The time value of money (TVM) is a foundational concept in finance. TVM impacts all forms of finance from business, to consumer, as well as government (Murphy, 2000). TVM is integrally related to interest and concepts related to interest. TVM is also referred to periodically as the discounted present value (DPV) and was first discussed as far back as the 12th century (Murphy, 2000). TVM relies on the concept that a preference for some sort of immediate returns on a given sum of money rather than merely receiving the same amount of money at some point in the future. TVM essentially states that a deposit of $1,000 accumulates an amount of interest resulting in an increase in a given period of time. "

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