Laila C. Revollo Rivas FIN 301 - 01 09/21/2023 Three Fundamental Principles of Time Value of Money (TVM) Introduction: Time Value of Money (TVM) is a fundamental concept in finance that underscores the idea that a sum of money has different values at different points in time. This concept is essential for making informed financial decisions, whether it's in personal finance, investing, or corporate finance. Three fundamental principles underpin TVM, each contributing significantly to understanding the concept's relevance and application. Principle 1: The Principle of Compounding The Principle of Compounding states that money invested today will grow over time due to interest or investment returns. In essence, it illustrates that the value of money increases when it earns interest or generates returns over time. Compounding occurs when interest is earned not only on the original sum (principal) but also on any interest or returns previously earned. The longer the money is invested, the more it can grow due to compounding. Relevance to TVM: Understanding compounding is crucial because it allows individuals and businesses to calculate the future value of investments, loans, or savings. By recognizing that money can work for them over time, individuals can make better financial choices, such as saving for retirement or assessing investment opportunities.
