The time value of money' is the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. In other words, the present value of a certain amount of money a is greater than the present value of the right to receive the same amount of money time t in the future. This is because a amount of money could be deposited in an interest-bearing bank account (or otherwise invested) from now to time t and yield interest. Consequently, lenders acting at arm's length demands interest payments for use of their capital.
Additional motivations for demanding interest are to compensate for the risk of borrower default and the risk of inflation (as well as some other more technical factors).
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment