general
Time Value of Money (TVM)
The time value of money is the principle that a dollar today is worth more than a dollar in the future because money available now can be invested to earn a return.
Formula
FV = PV × (1 + r)ⁿ TVM is the foundation of all finance calculations. Present value (PV) tells you what a future amount is worth today. Future value (FV) tells you what a present amount will grow to.
FV = PV × (1 + r)ⁿ. At 7% annual return, $1,000 today becomes $1,967 in 10 years. Conversely, $1,967 to be received in 10 years is worth only $1,000 today at a 7% discount rate.
Every mortgage payment, bond price, pension valuation, and NPV analysis is built on TVM arithmetic.
Related terms
- Compound Interest
- Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.
- Rule of 72
- The Rule of 72 is a quick mental maths shortcut: divide 72 by an annual interest rate to estimate the number of years it takes for an investment to double.
- Rate of Return
- A rate of return (RoR) is the net gain or loss of an investment over a specified period, expressed as a percentage of the initial investment.
Frequently asked questions
What is Time Value of Money (TVM)?
The time value of money is the principle that a dollar today is worth more than a dollar in the future because money available now can be invested to earn a return.
What is the Time Value of Money (TVM) formula?
The formula is: FV = PV × (1 + r)ⁿ