Time Value of Money
In this entry, we introduce the mathematical process of translating a value today into a value at some future point in time, and then show how this process can be reversed to determine the value today of some future amount. We then show how to extend the time value of money mathematics to include multiple cash flows and the special cases of annuities and loan amortization. Finally, we demonstrate how these mathematics can be used to calculate the yield on an investment.1
IMPORTANCE OF THE TIME VALUE OF MONEY
The notion that money has a time value is one of the most basic concepts in investment analysis. Making decisions today regarding future cash flows requires understanding that the value of money does not remain the same throughout time.
A dollar today is worth less than a dollar some time in the future for two reasons: