What is time value of money?


Will the value of money over time remain the same or change? and How has it changed over the years?

This article will share you in detail about this: Including definition, calculation and examples…

Specifically, the content includes:

What is the concept of time value of money?What is the future value of money? What is the present value of money?What is the formula for time value of money?What is the meaning of time value of money?

I. What is the time value of money?

The concept of time value of money:

Money value over time (English is Time Value Of Money) is understood as the amount you have now will have a greater value than the equivalent amount in the future.

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Indeed, 100 million now and 100 million three years from now are clearly equal in terms of mathematical numbers, but in terms of utility value, 100 million today is more valuable. The reason, if you invest 100 million now (stocks, for example), you can have more profit after three years. And of course the value of three more years will be (100 million + interest).

Why is money valuable over time?

Opportunity cost of money: money always has the opportunity to profit. Interest is the lost opportunity cost if you choose option B. Therefore, investors need to consider to choose the type of stock with the highest opportunity cost to invest.Calculate inflation: That is, the currency is depreciated in value. Keeping money at home is one of the causes of inflation. It is best to invest in a circulating currency that both increases in value and promotes economic development and the currency increases in value.Calculate risk: economic, political, and social fluctuations create risks. Of course, keeping money is also risky. So find a way to invest, the more risk, the higher the return.

Based on the nature of the value of money over time, we only have one choice: “Let the money make money”, that is, to invest and invest wisely. Please study, research a lot (quite a long time), if you want to shorten the time, join securities course of 500dong or Happy-Fund fund.

II. What is the future value of money? What is the present value of money?

Assumption: Congratulations!!! You have won a cash prize. You have two payment options:

Option A – Get 100,000,000 VND now.

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Option B – Receive VND 100,000,000 in three years.

What is future value?

Future value (or Future Value – FV) is the value formed from 100 million in option A after three years, ie: (100 million + interest)

Suppose: If you invest 100 million in option A in a stock with a 12% interest rate, what is the future value after 3 years?

We can easily calculate:

Future value after 1 year: FV = 100 + 100 x 12% = 112 (million VND)Future value after 2 years: FV = 112 + 112 x 12% = 125.44 (million VND)Future value after 3 years: FV = 125.44 + 125.44×12% = 140.4928 (million VND)

We have the formula to calculate the value of money in n years with compound interest i as:

FV=100 CZK (first+i )^n

What is the current value?

Present value (or present value – PV) is the actual value of 100 million VND in option B. Assuming 100 tides is the future value, we have:

The formula for the present value of money in n years at an interest rate i is:

PV= FV/(1+i)^n

That is: PV= 100/(1+12%)^3 = 71,178 (million VND)

We say, VND71,178 million is the present value of VND100 million three years from now.

In addition, 71, 178 are also known as discounted value or discounted price.

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So choosing option A is the best, not only according to feelings but calculations with scientific basis. It shows that calculation is very necessary for investors.

III. What is the formula for time value of money?

The formula for calculating the time value of money:

From the formula for calculating the present value and the formula for calculating the future value, there is a general formula:

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In there:

FV: Future value of moneyPV: Present value of moneyi = interest raten = number of double cycles per yeart = number of yearsExample of time value of money:

Same with the assumption at the beginning of the article, but option B receives 150 million in 3 years, we will choose option B (because at the same time in 3 years you will receive 150 million> 140,4928 million, ie opportunity cost in option B is higher). Or you can choose option A and then invest in a more promising stock with a higher yield for a higher opportunity cost.

In addition, the number of double cycles also affects the calculation of the time value of money. Still 100 million dong above, the interest rate is increased by quarterly, monthly, and daily cycle. We have the money value after 1 year as:

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IV. What is the meaning of time value of money?

Time value of money tells us that the present and future values ​​of money are not the same.

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Based on the formula to calculate the value of money over time, we can calculate to choose the most optimal solution. Investors can easily choose promising stocks and consider them in a reasonable buying and selling decision in each period.

Through this article, have you understood what time value of money is and are confident in your choice?! To be confident on the investment battlefield, investors first need to invest in knowledge in many ways, taking a stock course of the Horse is the most effective and saving way, (limiting the loss of stupid money because of losing to the stock market). , and make more profit faster)

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Currently, many investors, groups and employees of securities companies such as SSI, HSC, you entrust your investment to copy on your forum, website, please cite the source of the article. Thanks!

Source: internet

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