Final answer:
The time-value of money is a concept in finance that states that a dollar received in the future is worth less than a dollar received today. It plays a crucial role in investment decisions and financial planning.
Step-by-step explanation:
The time-value of money is a concept in finance that states that a dollar received in the future is worth less than a dollar received today. This is because the value of money decreases over time due to factors such as inflation and the opportunity cost of not being able to use the money immediately. To illustrate this, consider a $3,000 bond issued at 8%. The present value of this bond is also $3,000, as it represents the amount of money the borrower receives. The present value is the same for the lender, showing that money is being moved around in time without any change in value.
Furthermore, the time-value of money is essential in making investment and financial decisions. By calculating the present value of future cash flows, individuals and businesses can evaluate the worthiness of an investment and assess the potential returns. This calculation requires knowing the interest rate and time period involved.
In summary, the time-value of money is based on the belief that a dollar received in the future is worth less than a dollar received today. It is a fundamental concept in finance and plays a crucial role in investment decisions and financial planning.