Value Of Money Essay

Interest from past periods are not used in calculations for the subsequent periods.Simple interest is usually used for a single period loan of less than a year, such as 30 or 60 days loans.TVM is also often referred to as "present discounted value" (Answers Corporation, 2006).

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Additionally, a variety of Risk Premiums are added to compensate the lender for risky loans such as unsecured loans made to borrowers with questionable credit ratings or loans that the lender may not be able to easily resell.

The first two components of the interest rate listed above, the real rate of interest and an inflation premium, collectively are referred to as the nominal risk-free rate.

The time value of money depends upon the rate of return or interest rate that can be earned by investing the current money on hand" (p. To In financial management, one of the most important concepts is the Time Value of Money (TVM).

Many of the assets businesses and individuals own are financed with money borrowed from others, so the understanding TVM is crucial to making good buying and borrowing decisions.

A dollar today is worth more than the same dollar tomorrow.

Time value of money concepts helps a manager or investor understand the benefits and the future cash flow to help the manager or investor if the future benefits will justify the initial cost of the project or investment.The interest earned in each period is added to the principal of the previous period to become the principal for the next period.For instance, you borrow ,000 for three years at 5% annual interest compounded annually.In the United States, the nominal risk-free rate is estimated by the rate of US Treasury bills.Simple interest is calculated on the original principal only.To recognize how In financial management, one of the most important concepts is the Time Value of Money (TVM).To recognize how Businesses need to understand how their money, investments, or loans are a benefit or detriment to them over time.The formula is: Simple Interest = p * i * nwhere:p = principal (original amount borrowed or loaned)i = interest rate for one periodn = number of periods Compound interest is calculated each period on the original principal and all interest accumulated during past periods.The interest rate normally is stated as a yearly rate.The compounding periods can also be yearly, semiannually, quarterly, or even continuously.Imagine compound interest as a succession of back-to-back simple interest contracts.

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