Time Value of Money

967 WordsJun 2, 20084 Pages
Time Value of Money The time value of money relates to many activities and decision in the financial world. “Understanding the effective rate on a business loan, the mortgage payment in a real estate transaction, or the true return on an investment depends on understanding the time value of money” (Block, Hirt, 2005). The concept of time value of money helps determine how financial assets are valued and how investors establish the rates of return they demand. Many different types of companies use the time value of money, such as commercial banks, credit card companies, insurance companies, retirement advisors, and the state government. As an individual or company, the importance of understanding how each of these company’s…show more content…
All contributions and earnings are tax deferred meaning taxes are only incurred when the money is withdrawn. An individual can determine how much would be needed for retirement by determining the future value so that one will know how much one’s money will be worth using an estimate of time at a certain interest rate. This calculation is important for determining how much money will be needed for the future because of inflation. Lastly, the government also has a use for the time value of money concept. Today the economy is struggling and said to be headed towards a recession. One way to stimulate the economy is to increase consumer spending, to accomplish more consumer spending the government is contemplating a tax rebate for taxpayers. “Our system of money operates on a mutual set of beliefs; so long as enough of us believe in the future value of money the system will work” (Moffatt, 2007). The government is now budgeting to decide whether the tax rebate would increase the future value of the dollar and stimulate consumer spending. References Bankrate, (2008). The true cost of paying the minimum. Retrieved January 25, 2008, from www.Bankrate.com Web site: http://www.bankrate.com/brm/calc/MinPayment.asp#More Block, S., & Hirt, G. (2005). Foundations of Financial Management (11th ed.).Burr Ridge, IL: Irwin/McGraw-Hill. Moffatt, M (2007). Why does money have value?. Retrieved January 26, 2008, from About.com: Economics

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