Time Value of Money Perhaps we know that time is one of the most precious assets in our lives. In the financial world, the value of money is tied to time, mainly because investors expect progressive returns on their cash over periods of time and always compare the performance of certain investments with current or average market returns. Inflation, on the other hand, erodes the purchasing power of money by causing the future value of a dollar to be less than the current value of a dollar. This article will examine the time value of money and the applications that determine success or failure. An examination of the different vehicles that can be used to generate financial security for businesses and individuals will be provided. After defining the applications that generalize the time value of money, an explanation regarding the components of interest rates will be offered by expanding the concept that the interest rate equates the future value of money to the present value. Applications of the Time Value of MoneyCapital markets are markets "where people, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments that have a shortage of funds (because they spend more of their income)" (Woepking, ¶3). The two main capital markets are the stock and bond markets. Capital markets promote economic efficiency by moving funds from those who do not immediately need them to those who do. Individuals or companies will put money at risk if the expected investment return is greater than the return of holding risk-free assets. An example of this would be those who invest in real estate or buy stocks and bonds. Investors want stocks, bonds or real estate to grow in value or appreciate. An example of this concept would be if an individual or company invested an amount saved over the course of a year. Although investing may be riskier, these individuals hope that the investment will yield a higher return than leaving the money in a savings account with nominal interest. In this example companies issuing stocks or bonds have spending needs that exceed their income, so the company will finance its spending needs by issuing securities in the capital markets. It is a method of direct finance as "companies borrow directly by issuing securities to investors in the capital markets" (Woepking, ¶5).