The Time Value of Money: The Math Behind Interest Rates

Updated: May 9, 2021

We’ve all heard the phrase “Time is money.” But what do these two things actually have to do with one another?

German Nande explains the math behind interest rates, revealing the equation that will allow you to calculate the future value of your money.

Applying the formula to investments

Most investments have historical performance data, which you can use to calculate the time value of money.

Applying the formula given in the video will help you determine if that particular investment can help you achieve your financial goals.

For example, at present the compounded annual growth rate of the Philequity PSE Index Mutual Fund for the past 10 years has been 16.31% – we can use this number to compute the time value of money.

This means, if you invest P100,000 in it, and assuming the same performance of the fund, then your investment will be worth around P453,075.47 after 10 years.

The given formula, and doing such calculations, will come in handy when you are planning and managing your investments. So learn it by heart.

I hope this simple lesson on the time value of money has helped you become a little smarter when it comes to investments.

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  1. Hi Fitz,

    Long time lurker here and a newbie in starting UITF investment. I have several questions:

    1) regarding investing in dollar bonds: With the expected increase in the US interest rate by the fed reserve, how will this affect UITF $ bond investment? Should I invest right now while the interest is low or wait for the increase? Which is the more appropriate strategy? or is $ bond not a good investment right now?
    2) How will the increase in US interest rate affect $ UITF investment in the money market? and Equity?
    3) Which denominated currency (Peso or Dollar) is best to invest in UITF (specifically money market, bonds and equity) right now?

    Thank you. Looking forward to your response.

  2. @iamra

    The dollar bond market is a good investment right now. Wait until the announcement of the interest rate before going in.

    Traditionally, bonds and equities are inversely correlated. When US stocks indices are falling, bonds are normally going up.

    Lastly, I’m biased towards peso UITFs because fundamentally, the Philippines has a better economic outlook than the US for the next few years.

  3. Hi Fitz,

    Just for clarification, your response “The dollar bond market is a good investment right now. Wait until the announcement of the interest rate before going in.” – does it refer to dollar bond UITF? or individual bond?

    I’m having difficulty understanding how buying bond UITF can make profit in a market expected to have increasing interest rate. Can you please give a numerical example.

    Thank you once again.

  4. Where can we get information regarding when the US interest rates will increase? Thanks.

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