Time Value of Money

What is the Time Value of Money?

The term Time Value can apply to either money or options.

For money it is simply the idea that money right now is worth more than money in the future. The way to work out the present value of money is to divide the future payment by the prevailing interest rate. For example, if the risk free rate is 3%, $1000 in a years time is worth $970.8 today (1000 / 1.03). This is a key concept in a DCF.

For options, the time value is simply the value of the option that is due to the time left till maturity.

 

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