Money is not worth the same amount tomorrow as it is today. The time value of money explains that the future value of money will increase as it is allowed to “grow” through interest (Block et al., 2022). It can become a complex system, but overall the idea is that money invested today will be able to increase and grow through periodic investment. High yield savings account can be a great example of values today versus values of the future. I used to avoid investing money in anything other than my own personal savings account until I realized the benefits that could come with investing my money, even at a small rate. Any positive rate is better than a rate of zero! Within my high yield savings account (HYSA), I am receiving 4.35% interest. With a base amount of $55k, my money will receive an increase each month. That $55k that I had 8 months ago is now worth more simply from the ability to grow in the HYSA. Inflation can cause significant effects to interest rates and bonds. When consumers expect inflation to continue to be significant in an economic market, the yield to maturity and the price of the bond will increase (Block et al., 2022). In general, businesses want to maintain stability and grow their investments as much as possible. This becomes harder as inflation causes the cost of goods and services to increase. Similarly, went inflation decreases or is on a decline, the rate of return decreases. Though inflation can be an incentive for consumers to “join the market” and invest money in order to increase in value, inflation decreases purchasing power overall (Frommel, 2020). Additionally, as inflation rose to 3.4% in December, we are now seeing HYSA rates upwards of 5% (Govindarajan, 2023). These two factors will play a significant role in consumers’ comfortability level to invest and attempt to utilize the time value of money. As it continues to cost more to borrow money, business will feel the effects of higher interest rates when attempting to increase capital or expand into new markets. References
Block, S., Hirt, G., & Danielsen, B. (2022). Foundations of Financial Management (18
th
ed.). McGraw-Hill
Frommel, M. (2020). An alternative version of purchasing power parity. International Journal of Finance & Economics, 25
(4), 511-517. www.doi.org/10.1002/ijfe.1767 Govindarajan, V. (2023, December 22). How companies can prepare for a long run of high inflation. Forbes. www.hbr.org/2023/12/how-companies-can-prepare-for-a-long-run-of-high-inflation
Rob,
You mentioned investors that could possibly be concerned with the future of inflation and the impact on the bond’s yield. With inflation on the rise, interest rates could increase as well as bond yields. I did a little digging into interest rates to see a quick snapshot of how we as a society are holding up against increasing prices of goods and services. Misra
(2023) states that the Federal Reserve decreased rates to near zero percent in 2008 and then again in 2020 during the pandemic. This caused an increase in consumers purchasing short term borrowing opportunities. Now that the rates have benchmarked around 5.25 percent, Misra (2023) suggests that many business managers aren’t aware of the effects
and better uses of money. They are not seeing the time value of money as an investment deal, but rather something that should be reviewed only periodically instead of daily. It is interesting that after the Feds determined that we needed
an economic boost with that near zero interest rate for a while, very intelligent business operations teams are unable to
continue to reap the benefits of investing when the rates increase to above normal value.
