Simply put, the time value of money is the idea that a sum of money received now is worth more than the same sum of money received in the future. Read on to discover everything there is to know about types of time value of money and to become a subject matter expert on it.

Knowing how money’s value changes over time is crucial for good decision making in finance’s capital budgeting and valuation. This is very important to understand. A borrower must understand time value of money principles before accepting a loan.

## Types of Time Value of Money

Consider the potential loss and future value of money when investing. For example, it’s not certain that you could put the $1,000 in the recommended company and get a 5% return each year. Instead, when you invest, you are willing to lose money in the hopes that your money will grow faster than inflation. No matter what kind of investment you make, this is always true. Continue reading to become an expert in types of time value of money and learn everything you can about it. To understand more clearly, keep reading about role of central bank in money market**.**

### Future Value (FV)

When you multiply the present value of a stream of cash flows by a compound interest rate over a certain amount of time, you make a certain amount of money.

### Inflation

In an economy with inflation, the money you get today is worth more than the money you will get in the future. In other words, one rupee will buy more today than it will in the future.

### Consumption

On average, people choose to spend their money now rather than in the future. So, people value the money they get now more than the money they will get in the future.

### Annuity

An annuity is a type of financial contract in which a person buys a financial product from a financial institution, and the institution agrees to take the product and grow it so that it can pay the person a series of equal payments when the annuity is set up. An annuity is a set amount of money that someone receives or pays out (known as Cash Flows) at regular intervals that stay the same over time.

Usually, a year is considered to be the length of time for an annuity. A Fixed Annuity is a type of Annuity in which the Cash Flow stays the same over time, regardless of how the market changes. Investors who want to avoid as much risk as possible often choose this kind of annuity.

Variable annuity is a type of annuity where the rate of return is not guaranteed to stay the same over the life of the contract. It depends on how the market goes up and down. Most investors who like this type of investment are willing to take on a lot of risk and want to make a lot of money.

### Types of Compounding

Problems that get worse over time cause three out of six uses of a dollar. In these problems about the time value of money, you have to figure out how much a single sum of money will be worth in the future, how much a series of payments will be worth in the future, and how many payments you need to make to reach a certain future value.

### Investment Opportunities

An investor profits by using a rupee today to acquire something more valuable later. For example, someone who wants to invest can put Rs 1,000 in the bank and expect to get 8% back after a set amount of time, like a year.

### Present Value (PV)

Applying a discounting rate to the future value of a cash flow and figuring out the cash flow present value gives you this amount of money.

### Risk and Uncertainty

The future is never certain and is always full of risks. Since we pay for parties ourselves, we have full control over how much money goes out. There is no way to know for sure how much money will come in in the future.

Because a person or business doesn’t know for sure if it will get cash in the future, it would rather have cash now. Because of this, it is less likely that you will get 1 rupee tomorrow than you will get it today. This rule of thumb is also called the “bird-in-the-hand” analogy.

### Installments (PMT)

We use the word “instalments” to talk about payments that we expect to make or receive at regular intervals. When one makes payments successfully, the value changes to negative.

### Annuity Due

Cash flows happen at the beginning of each period for an annuity that is due. An ordinary or delayed annuity is one in which the Cash Flows happen at the end of each period, while an annuity due is one in which the Cash Flows happen at the start of each period.

### Interest/Discount Rate

One uses the rate of discounting or compounding to figure out how much money is worth now or in the future.

### Deferred Annuity

A deferred annuity starts benefits only after a certain amount of time has passed and the buyer has paid all premiums. With this type of annuity, cash flows happen at the end of each period.

### Types of Discounting

The other half of the dollar’s six functions is to discount goods and services. To solve time value of money problems, find the present value of a lump sum, a series of payments, and loan amortization payments.

### Time Periods (n)

It is the total number of time intervals for which we want to figure out how much a sum is worth right now or in the future. These times could be every year, every six months, every three months, every month, or every week.

## Frequently Asked Questions

### How is the Time Value of Money Used?

When making any kind of financial decision, it is important to think about how money changes over time. This helps a person decide whether or not a certain investment opportunity is worth pursuing.

### How is the Time Value of Money Measured?

When determining future money worth, look at the expected interest rate over time. To choose between a savings account, CDs, or bonds for a $100,000 investment, compare their interest rates. When the answer is yes, then the person should put their money into an account for savings. If the answer is no, the person should invest their money in things like CDs or bonds.

### Is the Time Value of Money Measurable?

After learning how to figure it out, the answer is yes. Math is much easier to understand and do when you use a calculator or a spreadsheet. But if you want to, you can also use a pencil and paper to do the math.

## Conclusion

The value of money in the future won’t be the same as the value of a dollar right now. And the same goes for the money people used in the past. The time value of money is the term for what we are talking about here. Companies can use it to figure out how likely future projects are to be successful. Also, if you are an investor, you can use it to find possible investment opportunities. Knowing TVM and its calculation enables wise spending, saving, and investment. Continue reading to become an expert in types of time value of money and learn everything you can about it.