IntroductionFinancial manager constantly has to make decisions based on the time value of money conception. The decision about a project, the firms should invest its capital resources or the firm should raise the capital resources if necessary for activities. Such decisions are made effectively and lead to an increase in the value of the firm financial manager has a sound understanding of the time value of money. Time value of money is thus extremely relevant to both investment and financing decisions. Not just to the investment and financing decisions of the firm, but at a personal level for us all. A dollar today is value more than a dollar in the future; since the dollar received today can obtain interest up until the time, the future dollar received.
Commercial banks use the concept of time value of money for the betterment of their business. Commercial banks take deposits from individual and institutional customers that the bank then uses to extend credit.
If Van deposits $100 at the bank, the bank then loans out $80 to Steve. The amount of the $100 that the bank received as a deposit that can be loaned out depends on the required reserve ratio as a set by the Federal. Therefore, the money supply has essentially increased from $100 to $180, thus "creating" money.
The key to this is the time value of money. If you pay the balance each month without accumulating interest, you have gained more time value from the money than the credit card company has. Add in the cost of mailing statements, staffing support desks, etc. and you can become a net drain on the credit card company. Obviously, the profit from advertisements included in your statement offsets this, but that profit is not coming out of your pocket. (Adequacy, 2001)When...