Time Value of Money The time value of money serves as the basis for all other financial notions. It affects corporate finance, consumer finance and public finance. The time value of money comes from the concept of interest. The idea is that money available now is worth more than the same amount in the future because of its potential earning capacity. This fundamental principle of finance holds that, as long as money can earn interest, any sum of money is worth more the sooner it is received. The time value of money can be illustrated by the fact that a dollar received today is worth more than a dollar received a year from now because today's dollar can be invested and earn interest as the year goes by. Implicit in any consideration of the time value of money is the interest rate and compounding period. This document will list various financial applications of the time value of money and explain the components of the discount/interest rate. Time Value of Money The present value of a certain sum of money is greater than the present value of the right to receive the same amount of money in the future. Stanley Block and Geoffrey (2005), establish some essential rules relating to the time value of money: 1. Money has a time value associated with it and therefore a dollar received today is worth more than a dollar received tomorrow, 2. The future value and the present value of a dollar are based on the number of periods involved and the current interest rate, and 3. Not only can you calculate future value and present value, but you can also determine other factors that suck since you can determine the yield (rate of return) . The concept of the time value of money is essential, not just for large companies that are looking to make big gains in profits,...... middle of paper......Money, retrieved April 23, 2007 from http ://www.answers.com/topic/time-value-of-moneyBlock, Hirt (2005). Fundamentals of Financial Management (Chapter 9) (11 ed.). McGraw - Hill Farms. New York.Block, Hirt (2005). Fundamentals of Financial Management (Chapter 14) (11th ed). McGraw-Hill Companies. New York.EconEdLink.org, Economics Minute: Time Value of Money, retrieved April 23, 2007, from http://www.econedlink.org/lessons/index.cfm?page=teacher&lesson=EM37Investorwords.com, Interest Rate, retrieved April 23, 2007 from http://www.investorwords.com/2539/interest_rate.htmlJacobitz, K., Online Lesson Plan, Interest Rates, retrieved April 24, 2007 from http://www.livinghistoryfarm.org/farminginthe30s/lrScience06 . htmlObringer, LA, HowStuffWorks.com, Main, Money, Economics, How the Fed Works, retrieved April 23, 2007, from http://money.howstuffworks.com/fed9.htm