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Finance Glossary

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Time Value

Definition:

See intrinsic value. All options have two components of value. Intrinsic value is how much you'd make if you exercised the option right now - intrinsic value can range from 0 to infinity. Time value is just the difference between the current price for that option and its intrinsic value.

The concept of time value relates to all of investing. That is, "a dollar today is worth more than a dollar tomorrow" (in a normal world). Why? Because today you can invest that dollar. You can buy stocks, real estate, commodities, bonds, ...whatever. And those investments give positive returns (risk adjusted) or you wouldn't make those investments. Even if you only buy a 1% very safe T-Bill that dollar today will be worth something like 1.00001 dollars tomorrow. The TIME involved in investing matters a ton: Warren Buffet has a great quote here that goes something like: "Wanna be a billionaire? Easy. Start with 100 grand of savings, put it in an index fund that goes up about 10% a year, and live to be 400 or so." For the R rated version of Time Value, see Discounted Cash Flow Analysis.

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