In economics, the concept of value of money It’s fundamental. This criterion stems from the principle that an amount of money in a different period may be valued differently.
In addition, it is necessary to take into account that the money must bear interest and that the present value is different from the value of a similar amount received later, stated in a website posting Ceupe.
Those who have developed this theory point out that the value of money changes over time, taking into account the income from the financial market.
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The theory of time value of money is based on three elements: inflation, the risk of lack of income and the particularity of this instrument. This explains the drop in value.
What affects the value of your money?
The main factors that affect the time value of money are the following:
- Cost effectiveness: obtain a return on the investment made in production assets.
- Rate of inflation: price growth over a period of time.
- The risk associated with investments: the possibility of not recovering the money invested.
According Ceupe, “the value of the risk premium is determined by expert judgment. When setting the discount rate, the interest rate of the banks and the rate of return are taken into account. The discount rate is defined as the rate of return and can be derived from different investment opportunities.
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The return that the investment can bring to its depositors is what determines the value of the interest rate.
The concept of valuing cash over time is based on the fact that its value varies gradually with the market rate of return. When comparing finances two terms are used: future value of funds and present value.
The first indicator is the one that refers to the total funds currently investedin which they will be converted after a certain period, taking into account the interest rate.
Instead, the current value is the future amount of income of reduced money, taking into account the interest rate established for the current period.
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The value of the type depends on the return and the nature of the investmentthe rate of inflation and the risk associated with the investment. (I)
Source: Eluniverso
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