Time Value of Money



The value of money is sensitive to the passage of time, meaning a dollar received today is more valuable than a dollar received a year from now. This is because of investment opportunity and inflation. The return that can be garnered from that dollar will be based on what investment opportunities exist and the rate of return that can be generated. Another consideration is investment risk. An investor seeking the possibility of a greater return will need to acquire riskier investments. Money also can lose some of its true value over time because of inflation, as the prices of most goods increase, decreasing the buying power of the dollar. The time value of money varies based on how these inputs change.

At A Glance