Legal Definitions - time value

Time value refers to the additional worth or cost associated with an asset, investment, or financial instrument due to the length of time remaining until it matures, expires, or its full benefits can be realized. It reflects the market's assessment of the opportunity to earn returns over that period, the uncertainty of future events, and the compensation for having capital tied up.

• Example 1: Stock Options

  Imagine an investor purchases a call option that grants them the right to buy 100 shares of Company Z stock at $75 per share within the next six months. If Company Z's stock is currently trading at $75, the option has no immediate profit potential (it's "at the money"). However, the option still possesses value because there are six months during which the stock price could potentially rise above $75. This potential for future price movement over the six-month period is its time value. As the six months elapse, even if the stock price remains at $75, the option's value will gradually decrease because there is less time for the stock to move favorably. If the stock does not rise above $75 by the expiration date, the option will expire worthless, having lost all its time value.

• Example 2: Corporate Bonds

  Consider a corporate bond that promises to pay its holder $1,000 in ten years, along with regular interest payments every six months until then. The market price of this bond will include a component related to its time value. This component accounts for the decade-long waiting period until the principal amount is repaid and the stream of future interest payments that the investor will receive over that duration. A bond with a longer maturity period (e.g., 10 years) typically commands a higher time value component in its price compared to an otherwise identical bond maturing in only two years, because it offers a longer period of guaranteed income and a longer duration for the principal to be invested.

• Example 3: Insurance Settlements

  In a legal dispute involving an insurance claim, the insurance company might offer a claimant two options for settlement: either a lump sum of $150,000 paid immediately, or a structured settlement of $165,000 paid out over three years. The additional $15,000 offered in the delayed payment option represents the time value of money. It serves to compensate the claimant for the inconvenience and opportunity cost of waiting three years to receive the full amount. During this waiting period, the claimant could have invested the immediate $150,000 and earned returns, or used it to cover pressing expenses. The insurance company is effectively "paying" for the benefit of delaying its full financial outlay.