Time Value of Money (TVM)
Time Value of Money (TVM)
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Time is money.
Clearly, receiving $100 today is different from $100 in a year. Usually, we will prefer the former and the reason is pretty simple — we could use this $100 today to make more money.
That, my friend, means your time makes money.
In finance, the price of time is called interest. Since it often comes in percentages, it is also called the interest rate.
Interest Rate
Interest Rate
Generally speaking, the interest rate is the price of time. It usually is shown as a percentage, such as your saving account's annual interest rate, let's say, 4%. It tells you how fast your money can grow given a period of time. In this case, if you put $100 at the beginning of the year, the bank will give you an extra $4 at the end of the year. This $4 is your interest earned; and 4% ($4 divided by $100, your principle) is the interest rate.
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