Time Value Of Money 2

Definition of "Time value of money"

Scott Chappuis
Scott Chappuis Grand Living Realty

Relationship determined by the mathematics of compound interest between the value of a sum of money at one point in time and its value at another point in time. Time value of money can be illustrated by the fact that a dollar received today is worth more than a dollar received a year from now because today's dollar can be invested and earn interest as the year elapses. Implicit in any consideration of time value of money are the rate of interest and the period of compounding. For example, the present value of $ 1 million received 10 years from now is only $386,000 today, assuming a 10% rate of interest and annual compounding. Insurance companies make use of time value of money by earning investment income on premiums between the time of receipt and the time of payment of claims or benefits.

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