Definition
TVM is the foundational concept of all finance: a dollar today is worth more than a dollar tomorrow because today's dollar can be invested to earn interest. This principle drives present value calculations, bond pricing, loan amortization, and all investment valuation. The discount rate reflects both the opportunity cost of capital and the risk of future cash flows.
functions Formula
PV = FV / (1 + r)^n
lightbulb Example
$1,000 received 5 years from now at a 6% discount rate has present value = $1,000 / (1.06)^5 = $747.26. You should be indifferent between $747.26 today and $1,000 in 5 years at 6%.
verified_user Key Points
- A dollar today > a dollar tomorrow
- Drives all present value and valuation calculations
- Discount rate reflects opportunity cost and risk
- Foundation of bond pricing, loan math, and DCF analysis