Factors That Affect the Time Value of MoneyEssay title: Factors That Affect the Time Value of MoneyFactors that Affect the Time Value of MoneyTime value of money is the concept that an amount of money in one’s possession is worth more than that same amount of money promised in the future (Garrison, 2006). The reason for this is that money today can be invested to earn interest and therefore will be worth more in the future (Brealey, Myers, & Marcus, 2004). This paper will explain how annuities affect time value of money (TVM) problems and investment outcomes. In addition, this paper will briefly address the impact of interest rates, present value, future value, opportunity cost and the rule of 72 on the time value of money.
AnnuitiesAn annuity is an evenly spaced number of payments or money received in the same amount (Cedar Spring Software, Inc., 2002). Each TVM problem has five variables: interest rate or return, time or number of periods, future value, present value, and amount of payments either made or received (Brealey, Myers, & Marcus, 2004). The present value of annuity payments received over a number of years is less than if one had the full amount in hand now to invest. The reason for this is opportunity cost. If the full amount of the annuity could be invested today in a lump sum, the final value during the same term of the annuity would be much higher due to compound interest. So opportunity cost in this case is the total amount of the annuity payments over the length of the annuity and the value of investing the annuity’s total value today at a specified rate of return. For example, person is receiving annuity payments of $500 per month for 20 years will receive 12 x 500 x 20 = $120,000 during the annuity period . If that same person had $120,000 in his or her hand to invest today at a modest 6% interest compounded annually, they would have $120,000 x (1.06)20 = $384,856 at the end of the 20 years. The 0pportunity cost of this annuity is $384,856 – $120,000 = $264,856. This annuity caused the person to miss the opportunity to make an extra $264,856 over the 20-year period.
Interest RatesInterest rates are the percentage of initial investment or loan received or charged during a period of time (Brealey, Myers, & Marcus, 2004). Most interest is compound interest which is basically interest on interest (Brealey, Myers, & Marcus, 2004). For example, if someone invested $10,000 at 10% interest compounded annually he or she would receive $10,000 x 0.10 = $1000 in interest after the first year. The next year that person would have $11,000 in principle ($10,000 + $1000) earning 10% interest which would equal $1100 in interest. The third year would see $12,100 earning that 10% and so on. So interest is the multiplier that makes the fact that money has a time value a true statement.
Present Value and Future ValuePresent value and future value are concepts that involve the affects of time on money. When calculating present value there is an assumption that a future amount of money is discounted by a certain percentage of the principle compounded for each period or year in the future (Brealey, Myers, & Marcus, 2004). The result shows how much a future amount of money is worth today. For example, if a person wanted to have $1,000,000 saved by the time they retire in 40 years, how much money do they have to invest in a lump sum today earning 10% interest? The present value = $1,000,000 divided by the interest compounded for 40 years. PV = $1,000,000/ (1.10)40 = $1,000,000/45.259 = $22,095. So $1 million 40 years from now at 10% interest has a present value of $22,095. Future value is the converse of present value in that it grows by the interest rate compounded each period for the number of years it is invested (Brealey, Myers, & Marcus, 2004).
The Present Value of Money
There is a new technique in which the value of money increases as soon as you accept a value of money, for example by changing the value of an old currency (such as a yen) through an event that occurs every day; for this it gives rise to a future value. However, the value of the money that you pay in cash has also changed the value as quickly as you accept the new value. So the value of money in an exchange between money, bonds and money becomes the value of the exchange itself, when its value is expressed. Thus, this value changes as a result of the changes in exchange rates of one currency when the exchange rate used to be different from the exchange rate used today (e.g., a yen) or other currencies. It is this new value in dollar and yen which is called the present. The present value changes as a result of the changes in exchange rate, and not only is it changing today, but it also changes in the history of a particular exchange. So when the exchange rate of a new currency changes with the value of the currency you get the value it used to get today. For example, a dollar used to be about as popular as it is today, but it was also used briefly because it was cheap and very convenient. Today, when most people trade dollars for dollars, it is much cheaper to be using dollars as a money form than to trade them for dollars. This change in exchange rates can be quite disruptive to markets, and to society at large.
Figure 3 shows the process of increasing the present value of a money using the changes in exchange rate. The value of the money rises as soon as you accept a new value in some currency, or changes your value to that value. This can occur not only through changes in exchange rate, but also through changes in exchange rates of gold and silver. As a rule of thumb, if some currency is as good for gold as it is for silver, then the value it can give a certain amount of profit is higher than the amount it will give on the sale of silver or gold if you purchase silver or gold coins. If the value of gold or silver is more than about 12.3% of its value you are paying more to buy it. But the value of the money in gold is less than or equal to $12.3 (approximately 1.35%) or $6.95 (about 1.38%) of its value so that a large part of its value is paid to buy gold, silver, or copper directly (a coin is about 9.33% of its value and 10.09% will be paid when it falls below $10). If it rises by more than 10% of its value, this currency is then worth nothing. The money cannot have value of zero because it cannot give any money to other people, or anyone at all. A common misconception about this phenomenon is that if the exchange rate for all money used to be less than or equal to the exchange rate for gold, silver or copper, then only the money of which it has value would get paid. In this case for instance, if gold exchanged by the exchange of 10.09% of its value for $1,000,000 dollars, it would have value less than 0.01 = $1,000,000 dollars.
As always, remember that changes in monetary order as in money are more destructive to the environment than changes in exchange rates. The present value of a monetary order is, by definition, of exchange rate in the sense that the exchange rate in each country is in the amount of exchange needed to produce the