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The Time Value Of Money The time value of money is simply a recognition of the fact that you can earn interest by putting money in the bank (or buying a bond). Consider the following example: If the bank interest rate is, say, 5% and you put $100 in the account this year, you would have $105 next year. This works in reverse as well. If you could buy the right to receive $105 next year, you would pay only $100 for this right. You would not pay more, because you could always get $105 next year by putting $100 in the bank today. In this example, we say that the "present value" of $105 one year from now is $100. A pension is just like this right to receive $105 a year from now. It is a series of fixed amounts which you will receive some years from now. Its "present value" is less than its face value because of the time value of money consideration.
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