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Financial Planning Competency Handbook, 2nd Edition by CFP Board

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CHAPTER 11 Time Value of Money

Jorge Ruiz-Menjivar

University of Georgia

Martie Gillen, PhD

University of Florida

Michael Gutter, PhD

University of Florida

CONNECTIONS DIAGRAM

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Time value of money is an essential component of financial planning and connects to all areas of financial planning. Time value of money calculations can assist clients in meeting their financial goals such as in education planning or retirement and income planning. Time value of money (TVM) refers to the notion that money received today is not worth the same as an equal amount of money received at a future date. For example, $100 received today is worth more than $100 that would be received 10 years from now, as today’s amount can be saved or invested, earning interest, and could subsequently compound in value. TVM calculations serve as tools for comparing prospective investments and projects, making sound financial decisions, and properly planning for clients’ objectives. Indeed, TVM calculations are essential in the world of financial planning. TVM is the foundation for financial modeling, stock and bond pricing, insurance, and pension fund valuation. Therefore, it is crucial that professionals in the field of financial planning master these fundamental concepts and calculations.

INTRODUCTION

The main types of time value of money (TVM) calculations are (1) converting present values to future values, ...

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