The value of money changes continually, and the change in value is called the time value of money. Investors who want to know the value of a future amount of money in today’s terms can use present value tables to calculate the time value of money. In some cases, the investor might want to know the present value of money based on a partial year, rather than a full year. The investor uses the time value of money factor for the partial year.
The time value of money factor allows the investor to estimate what a future investment balance is worth today. You can calculate the present value of each investment using the time value of money factor, and determine which investment provides a greater financial reward. The time value of money factor for a partial year allows you to calculate the value of each investment even when the investment lasts for an uneven number of years. You need to know the interest rate and the number of periods to locate the time value of money factor for a partial year.
Determine the number of periods by reviewing the partial year, and which is the largest time unit that applies to the partial year. Potential time units include half-years, quarters or months. Add the total number of units that exist from the current day until the end of the investment. This includes the total number of units in each full year and the partial year.
You can determine the interest rate by considering the number of periods in one year. Divide the interest rate by the number of periods to determine an interest rate per period.
Use present value tables to locate the time value of money factor. You can look up the total number of periods and the interest rate per period on the present value table to find the factor. Multiply this factor by the dollar amount of your investment to calculate the present value.
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