Time Value of Money (TVM)
Time value of money (TVM) definition relates to the value of money in time. How much will a rupee owned today be worth 1 year from now, i.e. If Rs 100 affords me to purchase say X amount of goods today, how many goods will I be able to purchase with the same Rs100, one year from now. Historically it has been found that the value of money has depreciated over the years, i.e. in 1 year from now I will be able to purchase less no. Of goods than X – that I was able to purchase a year back.
For the CFA exam the TVM compounding and discounting problems can be solved easily using the CFA Institute approved financial calculators. Please refer to the CFA Exam Policy and CFA calculator guide.
For finding the future value enter the values for the present i.e. PV (which should always be entered as negative as it is an outflow of money or investment), N = no of years or periods, I/Y = rate of interest and press CPT FV to gets the future value.
Annuities are fixed payments received at the end of the investment period. When you make an investment, at the end of the period you may either receive back lump sum amount or you may receive annuities, i.e. fixed payments at periodic intervals may be paid out to you.
That’s all in this post….in the next post we will cover discounted cash flow applications….stay tuned…