Value of Money a Common

¶ … Value of Money

A common phrase is "time is money." Please explain what is meant by this phrase?

On one hand, the expression time is money simply explains the notion of efficiency. Indeed, the more efficient an organization is and the more activities it manages in a shorter period of time, the more competitive it is likely to become and the more revenue it will generate.

However, in terms of finance, the expression time is money is related to the intrinsic connection between money itself and the moment when money is received. As such, an investor will always prefer to receive money today, at moment t0, rather than at some future t1 time. The value of the money received increased with the time when it is received, so that the present value of money is actually greater than the future value of money.

The reason for this is quite simple to explain. If you receive the money today, in the present, you (1) know their today value (the money might devalue in the next period of time) and can take steps to hedge your exposure to devaluation risks and (2) you can invest the money received at a return rate that can bring you additional profits. This would have not been possible if the money was received some time in the future.

2. Provide two examples of real world situations that apply the 'time value of money' concepts?

The first example that comes to mind is related to the fact that you would prefer to receive your salary on a Friday rather than on the next Monday. This does not necessarily mean that you might spent the weekend investing the salary received, but it does show that an individual would prefer to receive his money sooner rather than later on, so that he can dispose of them according to his own will. Although this does not necessarily have an immediate monetary translation, it shows that the individual will prefer to receive his money and dispose of them earlier rather than later on.

On the other hand, we can indeed see that the present value of money is greater if we can deposit the money received at time t0 to a simple deposit account, with a certain interest rate. We will expect that amount of money to gradually increase over time and to reach a higher value some time in the future. As we can see from this example, the time value of money does not only fluctuate, but actually increases from moment t0 to moment t1.

3. Does one always earn the yield to maturity on bonds? Explain.