Time has passed from bartering to digital currency, does the introduction of the concept of money hold value, or is it hypothetically perceived? The piece of paper doesn’t hold any but it’s the gravity of the importance that it holds makes it worthy.
The fine line between the concept of money and currency reveals a different perception of the entire concept. Money is a perceptual notion that is visualized in numbers, and the Currency is sensed in terms of a note and coins that we witness on day to day basis.
But whatever the distinctions are, it’s a medium through which the exchange of goods takes into account. So, the value it holds is by the importance given for exchange. Generalizing it to a Global value of $418 trillion.
Money though is the initiator for setting up businesses back in time and the businesses at the present time are running on a whole new level of imagination ever since and it all comes down to the numbers!
What’s the time value of money?
The clarity on the view of the value of money was made familiar but the time value of money plays an important role to make sense of the financial aspect of making investments than from the economic perspective.
“The time value of money at the present is collectively more than it is in the future as it can be grown by investing.”
Let’s understand the time value of money in a better way.
Assume you received a cash prize of Rs 2000 for your achievement at the workplace. Possibly one can take out money right away or choose to receive it after a year.
In the first option, the value of Rs 2000 received right away can be invented in any instrument for a time period of 1 year to receive an interest of 5%, which is equivalent to Rs 2100 in a year.
In the second option, the value of Rs 2000 received after a year will have the same value as Rs 2000 after a year. Let’s leave it to you to take a decision if Rs 2100 is a better choice or Rs 2000 would be.
The time value of money can be viewed from two perspectives.
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Time Value of Money: Present Perspective
“The concept of evaluating the worth of future profits in today’s date.”
In a simpler way, find the present value of the future profits. This might seem tricky to comprehend but can be visualized in a better way in terms of numbers.
Let’s assume an instance for visualizing the present value.
Imagining that you are about to receive Rs 4000 in the future in 5 years at an interest of 5%. Let’s figure out the present value of the money.
In order to find it, let’s go through the simple calculation.
Pv = Fv(1+r)t
Pv is the present value of the money
Fv is the future value of the money
r is the interest rate
t is the time in years
Using the above equation to find the present value of the money, we have,
Pv = Rs 3,125
It signifies that the present value of the receivable money of Rs 4,000 is equal to Rs 3,125 currently.
Time Value of Money: Future Perspective
This conveys the same point but in a way that the present value of money is predominantly more valuable.
“The value of the money in the present is worth more than the value of the money in the future”
Let’s dig deeper to analyze…
Assume Rs 10,00,000 was invested for an interest of 6% for 4 years. The future value of the money can be calculated using the equation.
Fv = Pv (1+r)t
Fv is the Future value
Pv is the present value
r is the rate of interest
t is time in years
The future value of the money comes down to
Fv = Rs 10,15,000
The future value signifies understanding whether the investment gives a greater future yield.
Types of Government Bonds
The concept of the time value of money
The concept can be explained using three aspects…
1. The next best alternative cost
We must have been familiar with the concept of opportunity cost which is otherwise known as alternative cost. Any expenditure decision will have an opportunity cost associated with it.
For instance, if you had a budget of Rs 10,00,000 to purchase a piece of land and the options you had in hand are to either purchase a land in developing city that has a growth in 2 years or a rural area where it was likely to grow in 10 years.
You make a decision to buy land in a rural area. In this case, the gains that could have been received by purchasing land in the developing city were more than in the rural area. The gains that could have been made is opportunity cost which arose due to having a limited budget and the decision to choose a rural area over a developing city.
In that sense, the opportunity cost of having Rs 10 invested now is more valuable than Rs 10 in the future.
2. The concept of a bird in the hand theory
The bird in the hand theory conveys that the investor in general tends towards certainty over predictability. Meaning, if you are invested in a bond, you’d prefer gaining dividends than relying on the possible capital gains.
So, the value of growing money in a year is more reliable than having to rely on the possibility of the money to have grown exponentially in 10 years.
3. The fact about inflation and depreciation
Future value is unpredictably lower when the inflation continues to rise. It implies that the value of the sum of money will lose its value in the future if the value of the money appreciates due to inflation. So, having a sum of money in the future is worthless when it could have been invested in the present.
These are all the possible reasons why the time value of money makes absolute sense.
The Scenarios:
The decline in the value of money
It has been several decades since the inherent fluctuation of the value of money has been under observation. During the economic boom created by the strategies employed at the NYSE, companies, and organizations larger than ever have been taken off the hook even though having engaged in unethical monetary policies.
Just before the shift to the digital paradigm, the value of gold has been a rollercoaster. There have been times when gold value shot to its highest ever and times amidst recessions when the value was at its lowest; literally off the cliff!
When you witness this trend, it is only evident that the monetization systems that are globally agreed upon and employed, are just large-scale economic experiments wherein the global production capacity has ballooned but at the cost of increased global debt.
Such a scenario is definitely imminent and must be a constant concern in the minds of economists and governments that deal with enforcing future financial policies. Smart investment decisions also hinge on being able to follow the global economic trends; if you’re thinking why would following news on war happening at a totally different part of the world matter; get into the mindset of an economist and understand the fundamental reasons as to why certain industries, generally taken for granted under normal circumstances, will fall in value. Don’t you think that’s creating a working investment portfolio at a great discount?
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The rise in the value of money
It is a pretty standard situation where forex rates witness constant vibrations induced by various global trends and market behavior. Due to the use of the SWIFT banking system; which has been the norm for inter-government transactions for a few decades now, the constant currency values as well as the performance of the industry behavior at large, impact the true money value rapidly. Increased industry performance and reduction in the overall debt by listed companies in the national indices, generally reduce the value of all the goods in general. The decreased economic burden on the markets and increased monetary liquidity ensure sufficient movement of national capital within the society which has an overall effect of the increased value of money.
That’s a load of technical jargon but what is the point of it all?
Decreased value of all economic investment mediums implies increased holdings capacity from a general investor point of view. Your saved-up investment capital could be worth more and hold a bigger chunk of the market compared to the pre-market correction phase. Identifying the general trend of decreased value of companies can be a sign that existing investors must pour more funds into their loss-making portfolio to generate higher returns after the market correction phase when the values reach their regular levels.
Why look at the time value of money?
Tradable assets generally are meant to reserve the existing and accepted value of that particular asset. However, due to the varying interest rates across the global banking sector, the behavior of bonds is affected. The time value of money is an apt example that takes the role of a value fluctuator.
Even though investors feel confident trading debt instruments, whether public or private, the factor of safety that any bond investor should feel is pretty high.
The value during bond issue is calculated to the exact requirement at par during the face value, however, the actual value post raising the bond capital, many external factors play a role in the settlement of the price to a certain value.
For any normal investors among us, the government-issued trust indicators play a vital role in the confidence levels felt by the lender; the bondholder, in this case, assessing the credit quality, being aware of industry-specific news, and predicting the trends in the value of money by simple educated assessments is of primal importance and should not be taken lightly; as being a confident investor demands such knowledge and comprehension.
Investment Strategies in the Bond Market
