Glossary of Time Value of Money Terms

The previous pages have outlined several applications for time value formulas. However not all applications are equally useful. Time value formulas are most useful when there is very little uncertainty about the future cash flows and the appropriate interest or discount rate. This would be the case when figuring out the fixed installment payment on an amortized fixed period loan or in the case of a publicly traded bonds whose price is affected by fluctuating interest rates.

Time value formulas are less useful when there is uncertainty as to the level of future cash flows and/or the appropriate interest rate to utilize. Time value formulas in themselves cannot remove these uncertainties. Users of time value formulas should not be lulled into a false sense of certainty in applications such as capital budgeting or pension funding.

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