Time Value of Money

1033 WordsOct 6, 20085 Pages
Time Value of Money (TVM), developed by Leonardo Fibonacci in 1202, is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM is based on the concept that a dollar today is worth more than a dollar in the future. That is mainly because money held today can be invested and earn interest. A key concept of TVM is that a single sum of money or a series of equal, evenly-spaced payments or receipts promised in the future can be converted to an equivalent value today. Conversely, one can determine the value to which a single sum or a series of future payments will grow to at some future date. The time…show more content…
Credit card financial service companies are commonly known to issue private student loans. Therefore, credit card companies would use the time value of money to determine loan payment schedules and the ending balance, the future value of the loan. Credit card companies would use the formula for present value of an annuity to determine the payment schedule, and they would use the formula for future value of an annuity to determine how much money the student will end up paying the credit card company at the end of the student loan. Insurance companies use Time Value of Money applications to determine and manage their cash flow and reserve to make sure they are prepared to cover their customers’ insurance claims at a certain point in time. Another way insurance companies make use of time value of money is by earning investment income on premiums between the time of receipt and the time of payment of claims or benefits. State Governments and Retirement Plan financial service providers use TVM to prepare the amount of money needed for a certain period of time, and the Retirement plan can be adjusted accordingly from time to time. TVM is also used by individuals as it helps one to measure the trade-off in spending and saving. This can have important consequences for their personal budgeting. If market interest rates are at 5%, one may decide that the time value of money is greater in the future, and decide to invest. If rates are 2%, one may

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