Time Value of Money & Factors Affecting Components of Interest Rates

Time value has primary significance in money mathematics. Whenever a discussion or an

incentive is initiated, it is a compulsion that one makes it provident and liable for its worth either

in the future or in the past. It can therefore be a measure of great importance that time value is

taken to measure this worth. if this concept is not taken into account, then there would be no

incentive for the lender to give his hard earned money, neither would there be an incentive to

procure future borrowing or paying back. Therefore, it is an essential a thorough point that not

only drives the industry but also forces the borrower to gain certain perks as per the required

scenario. The art of this concept is primarily divided into two broad categories that ought to be

mastered. First of these categories are Compounding and the second is discounting. If an amount

would be available in the future and one want to know its worth today than it is discount to its

present value and if the case is other way around, notably one has the money now and wants to

know its worth in a future date than the concept of compounding is utilized (Drake & Fabozzi,

2009).

The notable factors that impact interest rate of a country are primarily the supply and demand of

money. Whether it is determined on a regular basis or fluctuates with the market the supply and

demand are the two key components that ought to be kept in mind. There are however other

factors that regulate the demand and supply of money are numerous. This can be regulated by the

central bank of that country or it can be procured as the trade that country initiates. Notably the

balance of payments also plays a vital role in the determination of interest rate. Inflation, GDP

and other factors that affect the economy of the country in one way or the other are also

responsible factors that influence the rate of interest of the country. It can therefore be seen that

the factors that affect the countrys interest rate are numerous, their magnitude and direction
however vary with the nature of the variable and the economic condition of that country

(Osborne, 2014).

References
Drake, P. P., & Fabozzi, F. J. (2009). Foundations and Applications of the Time Value of Money.

John Wiley & Sons.

Osborne, M. (2014). Multiple Interest Rate Analysis: Theory and Applications. Springer.