FINMAN

• Time value of money

  A basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future
• Money that you have right now can be invested and earn a return, thus creating a larger amount of money in the future
• The time value of money is also related to the concepts of inflation and purchasing power
• Both inflation and risk need to be taken into consideration along with whatever rate of return may be realized by investing the money
• The time value of money is an important concept not just for individuals, but also for making business decisions
• Future value calculation


  Allows investors to predict, with varying degrees of accuracy, the amount of profit that can be generated by different investments

  
• The future value calculation is based on the assumption of a stable growth rate

  
• If money is placed in a savings account with a guaranteed interest rate, then the future value is easy to determine accurately

  
• Investments in the stock market or other securities with a more volatile rate of return can present greater difficulty in determining future value
• Simple and compound interest rates


  The most straightforward examples of the future value calculation

  
• Present value


  The exact opposite of future value - discounting future values at the given cost of capital to reach the present value

  
• Annuity


  A series of equal payments in equal time periods, usually 1 year
• Annuity


  • Provides a steady cash flow for people during their retirement years
  • Alleviates the fears of outliving their assets
• Accumulation phase


  The period of time when an annuity is being funded and before payouts begin

  
• Annuitization phase


  The phase that kicks in once annuity payments commence
• Present value of an annuity

  The current value of future payments from an annuity, given a specified rate of return or discount rate