What Is Time Value of Money?

923 WordsFeb 25, 20184 Pages
What is time value of money? The simple answer towards this question is that the same amount of money will have different value at different time. By this definition money is separated into its nominal value, which is the face amount, and the real value, which is the purchasing power of the money. The real reason here is that inflation exists, therefore when the price of a good goes up the same amount of money that was previously require to buy that good will not be able to buy that same good after the price increase. “Time value of money is the principle that the purchasing power of money can change over time” (Crosson S.V. 2008) Let’s take Bob, a student at Xiamen University as an example, every day when Bob wakes up he will walk out of his dorm room and go on the street to buy a piece of bread as his breakfast. At the start of the semester the bread is worth $3. He calculates that for the whole semester of three months he will need $276 to cover his breakfast costs, therefore he rings up his mom and ask her to transfer that amount at the start of the semester. However, draught happen during that semester resulting in a price inflation of the piece of bread, if Bob chooses to have the same amount of bread he will be needing an amount increase equal to the rest of the days for this semester times the $1 price change of the bread. The simple fact that the same 276$ which is worth 92 pieces of bread at the start of the semester can now only buy 69 pieces of bread is the

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