Financial Management: Real life applications of Time Value of Money

Real life applications of Time Value of Money
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Because of the time value of money, an amount at present time has more worth than in future and is affected by interest rates. For instance, deposits savings generate interests, and people prefer to receive the money at present rather than the future. Present value uses the discounting factor and hence the value to be received in future is less than what it is worth today (Garman, 2000). In any case money received now can be invested to generate more future income. On the other hand, receipt of money in the future has risks including inflation or default. The concept of time value of money is important for both personal and governmental finance and is mostly applicable where there is borrowing (Drake & Fabozzi, 2009).
Loan amortization in the banking and finance industry is one of the applications of time value of money. In essence, the amortization schedule is prepared showing the interest payments, and balances from the principal amount the amount that amortizes the loan follows the principles of time value of money, by first computing the present value annuity equation which becomes the annual payment that is constant. The money to be paid at the end of a year is the amount at the beginning minus the principal. At the same time the principal time is equal to the annual payments (computed using present value of annuity) minus interest. As the principal amount decreases over time so does the interest.
Adjustable Rate Mortgage (ARM) is a type of mortgage in loan which a lender can alter the interest rate after the initial period. Nonetheless, in America a lender cannot arbitrarily change the interest rate because they are based on a market index (Garman, 200...