Time Value Of Money

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Time Value of Money The time value of money indicates the relationship between time and money because of the opportunity to invest today's dollar and receive interest on the investment in the future. A dollar received today is worth more than a dollar promised sometime in the future. Interest is the payment for the use of the money lent or borrowed (principal). Interest is figured on a rate basis. Any amount of money invested is worth more the sooner it is received (Time Value of Money - TVM, 2013). Savings accounts draw interest on the balance of the account, usually for a year's time. Suppose $100 is invested today at a 5% interest rate. After one year, it will draw interest of $5, bringing the balance to a worth of $105 (100 x 1.05). Savings accounts also operate on compounded interest if the principal and interest are left in the account over the long term. The second year would be worth $110.25 (105 x 1.05). IRAs work on the same concept of compounded interest, but are usually made up of various investments of stock and bonds that carry and overall higher interest rate over the long run. The IRAs worth will depend more on the timing of the investments because the earlier money is invested, the higher the worth is later (For IRAs, Time is Money, 2012). For example, IRA1 invests $5000 on January 1 of the year and IRA2 invests $5000 on April 15, tax season, of the same year. IRA1 will have more months of compounded interest than IRA2 and yield a higher worth after

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