- TMV stands for "time value of money," which is about both the present and future value that is placed on money. The basic concept behind TMV is that money placed in the hand today is worth more than money that you receive tomorrow or at an even later date, due to the fact that the sooner interest starts accruing, the more money you end up with ultimately. Many different factors influence and cause problems with TMV, including compounding interesting, interest rates, opportunity costs and annuities.
- Annuities are, basically, a succession of fixed payments that you either pay or that are paid to you at a certain frequency over the span of a predetermined period of time. In generally, annuities frequencies are monthly, quarterly, semi-annually (two times a year) or annually. The two basic annuities types are annuities due and ordinary annuities.
- With annuity due, payments are necessary at the start of any payment period. Most bills are examples of annuity due (including rent bills). Any type of payment you must make at the starting point of a period is an annuity due.
- Ordinary annuity is when a payment must be paid at the finishing point of a period. A common example of an ordinary annuity is a straight bond, which requires semi-annual payments at the end of six months all the way up to the maturity date of the straight bond.
- When trying to calculate TVM for annuity due and ordinary annuity, the one problem that is important to remember is the fact that the current "ordinary annuity" value is less compared to the value of an annuity because the further back in history that a future payment is discounted, the lower its current value ends up becoming. This means that every single cash flow or payment (in the case of ordinary annuity) happens exactly one period ahead in the future (meaning the payment is slightly delayed). This is why annuities have a major effect on TVM and can sometimes end up being problematic. In order to avoid problems with TVM and annuities, remember the amount of payments and payment frequencies and the time frame in which the payments were submitted (especially whether they were made toward the beginning or the closing of a payment period). These are all crucial variables for TMV calculation purposes.
