Time Value of Money
time value of money
(TVM) describes calculations based on
cash flows (money received or money paid) earning
over a period of time.
calculations take into account
that interest, added to the principal at specified compounding periods,
also earns interest. Many financial problems are TVM problems-for
example, savings accounts, mortgages, pension funds, leases, and
The TVM equation is:
(also called the
the series of future cash flows. To a lender or bor-
rower, B is the amount of the loan; to an investor, B is
the initial investment. B always occurs at the begin-
ning of the first period.
amount of the final cash flow,
or the compounded value of the series of previous
cash flows. F always occurs at the end of the last
the periodic interest rate, expressed as a percent. For
example, if an account earns 10% annual interest,
compounded monthly, its periodic rate is
10/ 12 ,
the total number of payments or compounding peri-
ods. N can be expressed in any unit of time-for
example, years, months, or days.
amount of each periodic payment. The payments are
the same amount, and no payments are skipped.
Payments occur at the end of each period.
calculates a non-integer N, the answer must be interpreted carefully, since
the equation does not calculate partial period payments. Calculations using a stored non-
integer N produce mathematically correct results, but the results have no simple useful
7: The Equation Library