Time Value of Money

The value derived from the use of money over time as a result of investment and reinvestment. This term may refer to either present-value or future-value calculations. The present value is the value today of an amount that would exist in the future, given a stated investment rate called the discount rate. For example, with a 10% annual discount rate, the present value today of $110 one year from now is $100. Future value is the value in the future of a known amount today, given a stated investment rate. For example, with a 10% annual investment rate, the future value in one year of $100 today is $110. In either case, the interest rate used reflects the lost opportunities for return from alternative investments.

Source: Federal Reserve Board