TIME VALUE OF MONEYThe time value of money states that by paying cash today to receive cash tomorrow, the seller's note will have to get a discount because the lender/investor will have to wait to collect their money. The longer the lender has to wait to get their money back, the less they can pay today. The shorter the time before the lender can get his money, the more he is willing to pay today, though the seller's note still must get a discount. Whenever anyone pays cash today to receive cash at some future date, you have to get a discount because time erodes the value of the money. Let me give you a simplified example of the time value of money. When someone has a baby, a frequent gift to the new child is a U.S. Savings Bond. It's a great gift, because it matures in twenty years, when the infant will be an adult, either in college or perhaps starting a family and setting up a household. Suppose you buy the child a $100 savings bond. Do you pay $100 for it? No. The bond is worth $100 at maturity, so you pay much less. Would you pay $100 for that twenty-year bond now? Would you pay $100 today to receive $100 in twenty years? Of course you wouldn't. You'd pay maybe $50 or $60 dollars today. This is exactly how the time value of money works in a very simple example, familiar to everyone. It's paying less for something today because you will get your money back at a future date. When you buy a bond, the certificate states that it will pay a certain rate of compound interest. The compound interest will result in the $100 payoff at maturity. If you cash in the bond before maturity, you get less than the face amount of $100 because it will not yet have earned enough interest. Do you have questions?
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