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Time value of money

The time value of money is one of the basic concepts of finance. Time value of money is the change in consumption power of money over time. $100 today can consume more than $100 in 5 years.

A hundred dollars invested today at 5% per year interest rate will yield

<math>{\rm present\ amount}\times(1+{\rm interest\ rate})^{\rm term}=\$105</math>
in 1 year. So the future value of $100 in 1 year at 5% per year is $105

A hundred dollars 1 year from now at 5% interest rate is today worth:

<math>\frac{\rm present\ amount}{(1+{\rm interest\ rate})^{\rm term}}=\frac{\$100}{1.05}=\$95.23.</math>
So the present value of $100 1 year from now at 5% is $95.23

See Also: Time preference theory of interest



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