1. What is Time Value of Money?

The Time Value of Money (TVM) concept states that money available now is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

2. How Does the Calculator Work?

The calculator uses the basic TVM formula:

Where:

• \( FV \) — Future Value (USD)
• \( PV \) — Present Value (USD)
• \( r \) — Interest Rate (decimal)
• \( n \) — Number of periods (unitless)

Explanation: The formula accounts for compound interest over time, showing how money grows when invested at a given rate.

3. Importance of TVM Calculation

Details: Understanding TVM is crucial for investment decisions, loan calculations, retirement planning, and comparing financial alternatives.

4. Using the Calculator

Tips: Enter present value in USD, interest rate as a decimal (e.g., 0.05 for 5%), and number of periods. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How do I convert annual percentage rate to decimal?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05).

Q3: What are typical uses of TVM calculations?
A: Common uses include calculating investment growth, loan payments, retirement savings needs, and bond pricing.

Q4: How does compounding frequency affect results?
A: More frequent compounding (monthly vs. annually) results in higher future values for the same nominal rate.

Q5: Can this formula calculate present value from future value?
A: Yes, the formula can be rearranged: \( PV = FV / (1 + r)^n \).