The “Time Value of Money” (TVM) is a financial concept that states that a sum of money today is worth more than the same sum in the future, due to its potential earning capacity or opportunity cost.
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In other words, a dollar received today is worth more than a dollar received in the future because it can be invested or put to productive use immediately.
Interest rates play a crucial role in TVM by determining the rate at which money grows over time. When money is invested or borrowed, interest rates determine the return on investment or the cost of borrowing. Higher interest rates generally mean that money grows faster over time, increasing its present value and vice versa. Therefore, interest rates directly impact the present and future value of money, influencing financial decisions such as investing, borrowing, and saving.