Yield To Maturity
The idea that money available at the present time 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. Also referred to as "present discounted value".
Everyone knows that money deposited in a savings account will earn interest.
Because of this universal fact, we would prefer to receive money today rather than the
same amount in the future. For example, assuming a 5% interest rate, $100 invested
today will be worth $105 in one year ($100 multiplied by 1.05). Conversely, $100
received one year from now is only worth $95.24 today ($100 divided by 1.05), assuming
a 5% interest rate.
Relationship determined by the mathematics of Compound Interest between the
value of a sum of money at one point in time and its value at another point in time. Time
value of money can be illustrated by the fact that a dollar received today is worth more
than a dollar received a year from now because today's dollar can be invested and earn
interest as the year elapses. Implicit in any consideration of time value of money are the
rate of interest and the period of compounding. For example, the present value of $1
million received 10 years from now is only $386,000 today, assuming a 10% rate of
interest and annual compounding. Insurance companies make use of time value of money
by earning investment income on premiums between the time of receipt and the time of
payment of claims or benefits.
Expenditures for an investment most often precede the receipts produced by that
investment. Cash received...
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