A dollar received today is worth more than a dollar received yesterday. That is the essence of the time value of money. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

It is essential to understand the time value of money concepts and formulas presented below, but reliance on the formulas alone is not realistic to pass the CFP exam. Exam takers also must master the use of a financial calculator to have any realistic chance of passing the exam.


There are several different brands of financial calculators available on the market, but the financial calculator of choice for CFP exam takers is the HP 12C by Hewlett Packard.

Reference:
Understanding the Time Value of Money

Present value
The amount that a future lump sum is worth today given a specified rate of return.

An investment that earns 10% per year and can be redeemed for $1,000 in five years would have a present value of $620. In other words, $620 today is worth $1,000 in five years.

Formula
PV = FV / (1 + i)n
FV = future value
PV = present value
I = interest rate
N = compounding period

Future value
The value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

Formula
FV = PV(1+i)n

FV = future value
PV = present value
I = interest rate
N = compounding period


Consider the following example:

$1000 invested for 5 years at 10%, compounded annually has a future value of $1,610.51.

FV = $1,000(1+.10)5
= $1,000(1.10)5
= $1,610.51


Ordinary annuity, Annuity Due and Net Present Value

Related Articles
  1. Investing

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.
  2. Investing

    What is Present Value?

    Present value tells us how much a future sum of money is worth today, given a specified rate of return. This is an important financial concept based on the principle that money received in the ...
  3. Investing

    Time Value Of Money: Determining Your Future Worth

    Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation.
  4. Investing

    Understanding the Time Value of Money

    Find out why time really is money by learning to calculate present and future value.
  5. Investing

    Calculating the Present Value of an Annuity

    The present value of an annuity is the current, lump sum value of periodic future payments as calculated using a specific rate.
  6. Investing

    Learn Simple and Compound Interest

    Interest is defined as the cost of borrowing money, and depending on how it is calculated, it can be classified as simple interest or compound interest.
  7. Financial Advisor

    The Best Training Programs For CFP Exams

    The competition to become a financial planner is hot, and growing hotter. Find out the best way to preparing to land the CFP designation.
  8. Retirement

    How to Calculate the Value of Annuities

    Here's everything you need to account for when calculating the present and future value of annuities.
  9. Investing

    Accelerating Returns With Continuous Compounding

    Investopedia explains the natural log and exponential functions used to calculate this value.
Frequently Asked Questions
  1. How do you calculate r-squared in Excel?

    Calculate R-squared in Microsoft Excel by creating two data ranges to correlate. Use the Correlation formula to correlate ...
  2. What is the Difference Between International Monetary Fund and the World Bank?

    Learn about the International Monetary Fund and the World Bank and how they are differentiated by their respective functions ...
  3. Where Did the Bull and Bear Market Get Their Names?

    The terms bull and bear are used to describe general actions and attitudes, or sentiment, either of an individual (bear and ...
  4. What's the difference between Google's GOOG and GOOGL stock tickers?

    Learn the difference between Google's GOOG and GOOGL ticker symbols. Splitting shares into classes prevents management from ...
Trading Center