Time Value Of Money

Time Value of Money > Exam relevance: Time value of money (TVM) concepts appear in Section I (Economic Factors & Business Information, ~15% of the exam) alongside NPV and IRR. While this section carries the lowest weight, TVM questions are highly predictable and formulaic — mastering them is one of the easiest ways to bank correct answers. --- ## Why Time Value of Money Matters Money available today is worth more than the same amount in the future. This is the foundational principle behind nearly every valuation tool an investment adviser uses — from evaluating a bond's fair price to comparing two different investment projects. The Series 65 tests whether you understand *why* this is true and how it is applied through present value, future value, net present value (NPV), and internal rate of return (IRR). --- ## Core Concepts ### The Fundamental Principle A dollar today can be invested to earn a return, so it is inherently worth more than a dollar promised tomorrow. Three forces drive this: 1. Opportunity cost — money invested now can grow 2. Inflation — purchasing power erodes over time 3. Risk — future payments are uncertain ### Present Value (PV) Present value is what a future sum of money is worth in today's dollars, discounted at an appropriate rate. The higher the discount rate (the rate used to "shrink" future cash flows back to today), the *lower* the present value. > Key relationship: Discount rate ↑ → Present value ↓ This inverse relationship is the same logic behind bond pricing — when interest rates rise, the present value of a bond's future cash flows falls, so the bond's price falls. ### Future…