Tuesday, July 1, 2014

Time Value of Money

Time Value of Money is a concept that is essential to investing. Time Value of Money or TVM states that money in the present is worth more than the same amount in the future, because that money can be invested and earn a return. For example, if you were to receive $100 today, or in two years, you would choose to receive $100 today. Why? If treasury bills have a theoretical yield of 4%, then the $100 that is received today could be invested and earn $8 over two years. (Interest is not compounded in Treasury Bills) This mean that $100 today is worth $108 in two years.