An Application of the Time Value of Money
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Question: Highlight some of the key components of the Time Value of Money. Identify at least one financial application of the TVM employed by each of the following businesses:
a. Commercial banks
b. Credit card financial service companies
c. Insurance companies
d. State governments-lotteries
e. Retirement plan financial services providers
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Solution Summary
The solution highlights some of the key components of the Time Value of Money. One financial application of the time value of money employed by each of the different businesses is identified.
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One of the most fundamental concepts in finance is that money has a "time value." That is to say that money in hand today is worth more than money that is expected to be received in the future. The reason is straightforward: A dollar that you receive today can be invested such that you will have more than a dollar at some future time.
There are three asset components of the time value of money. They are Present Value (PV), Future Value (FV) and Payment (PMT) and they are made up of principal or principal and interest. Principal is expressed as a value of today. Interest per year is expressed as a percentage of principal and is stated as a annual ...
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