The backbone of finance and investment is the concept of the time value of money (TVM). The TVM concept spans from personal to corporate finance. In investments, TVM plays a major role, especially in decision making. For more detailed investment advisory services, you may visit https://truebellcapital.com/.
Every investor knows by heart the core principle of TVM. And if this is your first time investing, you must know the core principle of TVM and how it is used in investment decision making. Check Truebell Capital for more details.
A dollar today is worth more than a dollar tomorrow
This principle states that money received today can be invested to generate more money in the future. Whereas, money received at some future date can only be invested when the money has been received.
At Truebell Capital, you will most likely encounter investment managers talking about yield, rates, present value, future values, and annuities. As a beginning investor, you must understand these important time value concepts.
In basic finance, interest is a fee charged as a cost of investing and utilizing an investment. In TVM, interest is applied by compounding. In simple words, unpaid interests earn interests because it became part of the principal. Visit https://truebellcapital.com/ and speak to a manager to know how these concepts are applied in practice.
Meanwhile, simple Interest can be computed as:
Interest = Principal x Rate x Time
Assume that you invested $10,000 subject to a rate of return of 12 per cent. At the end of the second year, you will withdraw your investment.
If simple interest, your interest income for two years is $2,400 (10,000 x 12% x 2). Interest rates are always stated on a per-year basis.
Compounding means that interests also earn interest. If we compound the investment above, the maturity value of the investment would $12,544 as computed below:
Your total interest income for the two-year investment is $2,544. Investment managers at Truebell Capital will rarely use simple interest because the world of commerce mainly uses compounding.
Present value and future value
The present value is the value of a future amount today. In contrast, the future value is the value of a present amount at some future date.
PV = FV x (1 + k)-n
FV = PV x (1 + k)n
PV = present value
FV = future value
k = interest rate
n = number of periods
If you decide to sign-up at https://truebellcapital.com/ for investment services, you should be equipped with these TVM tools.
To apply the formula, if you have $200,000 today (present value) and you invest it for 10 years with a return of 14%, you will receive a future value of $741,444.
However, if you will receive $125,000 (future value) after ten years and it will earn 12% per year, the value today (present value) of your $125,000 is equal to $40,245. Thus, if you want $125,000 in ten years, invest $40,245 today.
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