value of money - it is an economic concept, which is the basis for the assertion that the capital must constantly generate income to the owner.Today, therefore, the value of cash flow is much greater than in the distant future will be assessed by the same amount."Father" of this concept can be regarded as Leonardo Fibonacci, who developed this concept further in 1202.However, a scientist who lived in the Middle Ages, has not allowed for the possibility of impairment of notes under the influence of external factors, because in his time at the course were only coins issued from precious metals and copper coins for small payments.
A time value of money, which is the fundamental concept of the theory of finance depends on two main factors - the risk of inflation.And the most vulnerable to the depreciation of paper money, a course which is not tied to the "troy ounce", in contrast to the credit of bank notes to be exchanged for gold.Therefore, time value of money at the moment is a measure used by economists of all modern states, which is particularly evident in the development of loan programs.
In this case the value of money is conditioned by the premise that people would prefer to receive a certain amount of right now than the same amount of the face value of notes in the distant future.When citizens or businesses contributes to the Bank, each of them wants to make money and earn income in the form of interest.Therefore, when making financial operations it is necessary to take into account the time factor and the analysis of long-term deals to summarize the values relating to different periods, is simply incorrect.
calculations
cost money, as well as other economic indicators, calculated by special formulas.So in financial management in the implementation of the work with monetary values in different time frames such amounts initially provided for the same period.To do this, all streams of payments have to be counted on the discount rate, which is the percentage used to calculate future income stream at a certain value of the current value.In addition to inflation, the figure includes the rate of return that an investor wants to use for his bank savings.
banking system
In the financial sector the value of money is required to be calculated at the time of the loan or deposit agreement, as herein prescribed interest rate.For example, if an investor decided to invest on a deposit of $ 5000 for five years at 12% by the end of the period, he will receive the $ 8,000.This means that the time value of money for the period increased by $ 3,000.And it increases it because owning these funds now, a person is able to profitably invest their savings, to get them to work for themselves, resulting in increasing their savings and make a profit.
effect of inflation
However, a certain number of years backfilled cost, consisting of the principal and the profits, which in this example is $ 8000, will have a lower purchasing power than a similar amount of money five years ago.This is due to inflation, which led to the depreciation of the contribution, real income will be much less than $ 3000.
Therefore, in the interest lies not only the risk premium, but the inflation rate, which is calculated in advance, taking into account the rate of currency depreciation.And in the period of hyperinflation backfilled unpredictable cost may be only nominal, since for that amount you can buy the same amount of goods as before the implementation of the deposit.For example, such situations often occur in developing countries, where the contribution is carried out not in dollars but in the unstable local currency.
