The Time Value of Money (TVM) is a core concept in economics and finance that states that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This principle takes into account factors like inflation and potential investment returns.
Understanding TVM is crucial for making informed financial decisions, such as investments, loans, and savings. It allows you to compare the value of money across different points in time and make the most of your financial resources.
Match the terms with their correct definitions:
| Terms | Definitions |
|---|---|
| 1. Present Value | A. The value of an investment at a specified date in the future based on assumptions about interest rate. |
| 2. Future Value | B. The interest on a loan or investment that is earned on both the initial principal and the accumulated interest from previous periods. |
| 3. Discount Rate | C. The current worth of a future sum of money or stream of cash flows given a specified rate of return. |
| 4. Compound Interest | D. The rate used to calculate the present value of future cash flows. |
| 5. Annuity | E. A series of equal payments made at fixed intervals for a specified number of periods. |
Complete the following paragraph with the correct terms:
The __________ of money is a fundamental concept in finance. It states that a dollar today is worth __________ than a dollar in the future due to __________ and the potential to earn __________. Calculating the __________ value and __________ value helps in making informed financial decisions.
Explain how understanding the Time Value of Money can help you make better financial decisions in your personal life. Provide specific examples.
Please log in to post your answer.
Log InEarn 2 Points for answering. If your answer is selected as the best, you'll get +20 Points! 🚀