Summary - Time Value of Money

• One of the most basic (and important) concepts in analysing investment is the concept of time value of money.
• The value of a present amount in the future, found by applying compound interest (or compounding) over time is known as future value. The future value of an investment can be increased by 1) earning a higher interest rate; and/or 2) investing for a longer period of time.
• Compounding more frequently, for example quarterly instead of annually, can also increase the future value of an amount.
• Present value is the current dollar value of a future amount, and is found by a process known as discounting. The present value of a future amount can be increased by 1) lowering the interest rate earned; 2) and/or shortening the period of time.
• An annuity is an equal, periodic stream of cash flows. The present value and future value of an annuity can be determined using their respectively interest factor tables (PVIFA and FVIFA).
• The concept of annuity is important in financial literacy as we encounter them in savings for retirement, and home loan amortizations.