Time value

 

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Time value

The time value of money is the simple concept that money in your hand now is worth more than money in a year's time, because you can earn a return on money by lending it out. If, for instance, you are able to earn 10% interest on money, and you are offered £100 now or £109 in a year's time, you should take the £100 now because in a year's time you can have £110 (£100 + £10 interest). If you are offered £111 in a year's time, you should take that option.In valuing companies, stock analysts use the concept of the time value of money to discount back the estimated future earnings of a company to their present value. This is meant to enable comparison of different companies whose future earnings may come at different times. By discounting, the value of those earnings is assessed on their present value, so like can be compared with like.In options, the time value is the amount by which an option's price exceeds its intrinsic value. Suppose the shares of XYZ are trading at 60p. There is an option to buy XYZ's shares before 1st December at 55p, and the price of that option is 8p.The intrinsic value of this option is the difference between the exercise price (55p) and the share price (60p) = 5pThe time value is the difference between the option price (8p) and the intrinsic value (5p) = 3pOptions have a time value to reflect the fact that, in the time until expiry (1st December) the option holder has the opportunity to make profits if the underlying share price moves in his favour. As that expiry date approaches, the time value will decrease until it reaches zero.

Time value

Applies to derivative products. Portion of an option price that is in excess of the intrinsic value, due to the amount of volatility in the stock; sometime referred to as premium. Time value is positively related to the length of time remaining until expiration.



Time value

Similar Matches

Conversion value

Conversion value

The value of a convertible security if it is converted immediately. Also called parity value.


Value investing

Value investing

Value investing is something of a misnomer in many ways as no-one would knowingly buy shares in a company unless they thought that the shares were good value. However, in investment circles it has come to mean the purchase of shares that look cheap according to particular criteria. Historically, this has meant the purchase of shares in companies which have low price earnings ratios (P/Es), a high level of asset backing, or high dividend yields, or a mixture of all three. As such it is contrasted with growth investing, where the investor focuses only on the potential for future earnings growth and is prepared to pay much high P/E multiple.So the heart of value investing lies in comparing two figures:Current Market ValueMultiply the number of ordinary shares in issue by the current price of each share to produce the market capitalisation. You can look up the market capitalisation of a quoted company in the financial pages of most newspapers, and on many financial websites.Intrinsic Value of the CompanyThere is no single way of establishing what the value of a company should be. Instead, value investors use a number of different valuation techniques, based on asset values, dividends, earnings, cash flows and other financial criteria.When a value investor identifies a discrepancy between the Current Market Value and the Intrinsic Value (according to the criteria he chooses), and the first is lower than the second, he invests. When the gap between them closes, or reverses, he sells, and takes his profit.


Long market value

Long market value

The market value of a security, excluding options, as of the close of the last business day.


Value added tax

Value added tax

Method of indirect taxation that levies a tax is at each stage of production on the value added at that specific stage.


Market value weighted index

Market value weighted index

An index of a group of securities computed by calculating a weighted average of the returns on each security in the index, where the weights are proportional to outstanding market value.


Further Suggestions

Value Line investment survey
intrinsic value
Unit-value isoquant
Expected value of perfect information
Market Value
diluted net asset value
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Imputed value
Reinstatement value
fair market value
value at risk
Value additivity principal
Breakup value
beta value
Hidden values
Value added
Net present value of growth opportunities
Value dating
Intrinsic value
fair value
Transaction value
Theoretical value
Marginal value product
Private market value (PMV)
Stated value


 
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