The Time Value of Money, in Five Keys
Imagine someone owes you $500. Take it all today, or in four installments spread over a year?
Almost everyone takes it today — not from impatience, but because money in hand can be put to work
immediately: spent, invested to earn interest, or used to retire debt that is charging interest.
That gap between a dollar today and a dollar promised later is the time value of money, and it
is why banks pay you (a little) for deposits and charge you (more) for loans: interest is the price
of having money at hand. Five variables describe nearly every such problem:
- N — the number of periods (months, years — whatever P/Y defines).
- I/Y — the nominal interest rate per year, before the P/Y and C/Y settings convert it to a per-period rate.
- PV — present value: what a future stream is worth today, or what you start with.
- PMT — a payment of the same amount every period: rent received, a mortgage paid, a deposit made.
- FV — future value: the balance at the end, after growth and payments.
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The $100 example every textbook starts with
Put $100 (PV) in an account paying 10% (I/Y) a year. After one year you have $100 × 1.10 = $110 (FV):
each dollar grew to 1 + 0.10 = $1.10. Leave it a second year and the $110 earns $11, giving $121 —
and that $121 has four parts: the original $100, the first year's $10 of interest, the second year's
$10 on the principal, and $1 of interest on the first year's interest ($10 × 10%). That last dollar is
compounding, and over long horizons it quietly becomes the biggest part. Run it backwards and you get
PV: $121 arriving in two years, discounted at 10%, is worth exactly $100 today. Discounting is just
interest with the clock reversed.
Mind the signs — the one thing everyone gets wrong once
Physical financial calculators insist on a cash-flow sign convention: money received is positive,
money paid out is negative. The five keys obey one identity — PV(1+i)N + PMT·s + FV = 0 — so at
least one of PV, PMT, FV must be negative for a rate to exist. Saving toward a goal? Your starting
balance and deposits are outflows (−), the target FV is an inflow (+). Borrowing? The loan lands in
your account (+PV), payments leave (−PMT), and FV is usually 0. Get the direction right and the
"wrong sign" answer everyone complains about disappears.
PMT: the payment questions
PMT turns this from a textbook exercise into the questions people actually ask. A rental property
paying $1,000 a month for 10 years — what is that stream worth today (solve PV)? A business throwing
off $100 a year forever-ish — what would you pay for it? A $30,000 down payment plus $1,000 a month
— what house does that buy, and what does it truly cost? The formulas are fiddly enough that they
belong in a calculator; just remember the timing setting. Rent and leases are paid at the
beginning of each period (annuity due), loans at the end — and the difference compounds into real
money.
Why this little calculator runs the whole site
Business students are rarely allowed into a finance exam without a BA II Plus or HP 12C, because
the profession runs on these five keys: every mortgage, loan, lease, and bond price is a TVM problem
wearing a costume. This page is that calculator with two things the plastic version lacks — a graph
of how the values move, and the full period-by-period schedule. Under the hood, most of CalcNova is
this same engine specialized: the
investment calculator is this
math in friendlier clothes (starting amount and contributions instead of PV and PMT signs), and the
financial calculators list is
largely a catalog of TVM questions, each with its own form. Learn these five keys and you have
learned the site.
FAQ
Why the negative numbers?
Sign convention: in is +, out is −. PV, PMT and FV view the same stream from one side, so they can't all be positive — see the signs section above.
When do P/Y and C/Y differ?
Canadian mortgages are the classic case: interest compounds twice a year (C/Y = 2) but payments are monthly (P/Y = 12). Most U.S. loans are 12 and 12.
I/Y won't solve — what's wrong?
No sign change, no rate. If money only flows one way, no interest rate balances the identity — physical calculators throw Error 5 for the same reason.
Beginning or end of period?
Rent, leases and insurance: beginning (due immediately). Loans and most savings plans: end. Each beginning-mode payment earns one extra period of interest.
Disclaimer: This calculator provides estimates for educational purposes only and does not constitute financial
advice. Rates are assumed constant over the full term.