Question

Why does money have a time value?

Short answer

The money possesses a time value because of its interest-earning capacity. This is why the opportunity cost of money also increases with time.

Step-by-step solution

Meaning of time value of money

The time value of money states that the dollar amount received today is worth more than a similar dollar amount received in the future.

Reason for money having time value

The money has the quality of fetching real return as well as the compensation for inflation prevailing in an economy. This is why the value of money increases with the passage of time. The return so generated by money are called as the time value. For instance, an investment of $1,000 providing $150 after an year indicates a time value of $150 that consists of cost of using the money, compensation for various risks such as inflation risk, etc.