Time Value of Money

Paper Summary:

The paper explains the principle of time value of money (TVM) that illustrates how money can grow by earning interest over time. This growth is made possible through various investment instruments, such as banks, stock market, annuities and insurance. The paper addresses the impact of the following items on TVM: interest rates and compounding, the present value (of a future payment received), the future value (of an investment), opportunity cost and annuities and the rule of 72.

Outline:
Interest Rates and Compounding
Present Value (of a future payment received)
Future Value (of an investment)
Opportunity Cost
Annuities and the Rule of 72

From the Paper:

"The growth of money is directly proportional to its amount. A small amount will earn only small interest, while larger amounts will earn larger interests. The Interest Rate is the percentage of growth for a given year. Money growth through interest is made possible by investments. Banks, for example, accepts money from its clients through deposits. It then uses this money as loan to other people and make a profit through the transaction. Because of this, the bank also has to pay some compensation to the original depositor, and this is the interest. Simply defined, interest is the cost of borrowing money. There are two types of interest: Simple and Compound."

Sample of Sources Used:

• Garrison, Sharon (2006). StudyFinance.com. "Time Value of Money" Retrieved February 24, 2006 from http://www.studyfinance.com/lessons/timevalue/index.mv
• Croome, Shauna (August 27, 2003). "Understanding the Time Value of Money" Retrieved February 24, 2006 from http://www.investopedia.com/articles/03/082703.asp
• Wikipedia contributors (2006). "Opportunity cost". Wikipedia, The Free Encyclopedia. Retrieved February 24, 2006 from http://en.wikipedia.org/wiki/Opportunity_cost
• Wikipedia contributors (2006). "Rule of 72". Wikipedia, The Free Encyclopedia. Retrieved February 24, 2006 from http://en.wikipedia.org/wiki/Rule_of_72

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