MD Junaid Kazi

221231020

Time value of
money

WE KNOW TIME IS MONEY

Definition of time value of money

The time value of money is the concept that the amount of money is worth more now than the
same sum will be at a future date due to its earning capacity and inflation.

For example: 1000 taka from today is not worth as one year later.
How to know about TVM
• There are two main theory to know the time value of money. These are called PV and FV

• Present Value = FV/(1+I)^n

• Future Value = PV*(1+I)^n

By these two theory we can measure exactly how much the money worth in value in present or
future value.
Present value
• Suppose we want 100,000 taka from 5 years later and the bank is offering us 8% interest
rate. So we need to find out how much money we need to pay bank to get the amount of
money.

• We know,
• PV=FV/(1+I)^n
=100,000/(1+0.08)^5
=100,000/1.8509
≈ 54,026.89
Future Value
On the othe hand we have 100,000 and the bank is offering us 8% interest rate. So we need to
find out how much money we will get 5 years later.

We know,
FV= PV*(1+I)^n
=100,000(1+0.08)^5
=100,0008(1.8509)
=185,090
Time Value of money in banking industry
To know about the time value of money in banking industry first of all we need to know how
banking system does work. Bank borrow money from their client and give loan to the
customers. In this process bank earn interest in return. This is the main way bank earn money.
So it is very important for banking sector to study and know about the time value of money.
Because todays $100 is not equivalent of next year $100. Money loses its buying capacity due
to inflation that is why time value of money keep us approximate point of view how
much money worth in future or present.
In conclusion, the application of type value of money in the banking sector is
fundamental to make best decision. Recognising that changing value of money
over time allow banks to make good investments. TVM helps banks to make
crucial crucial aspect of project, evolution of project and regulatory of customer
services and design its product.