Free Essay. Impact of Low-Interest Rate Environment on the Time Value of Money

A low-interest environment occurs when the governing central bank of a given country sets risk-free interest rates very low in relevance to a long period of time. The time value of money is whereby it is preferred to receive a said amount of money now rather than receiving the same amount of money at a later point in time. Money that is available now can be put into an investment and earn interest in the future (Holston, Laubach & Williams2017).Having the knowledge of Time Value of Money can very well help one in evaluating the validity of investment timing for maximum possible returns in terms of profits and interest.

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An asset is an economic resource that has monetary value whereas a liability is being responsible for something that has monetary value to another. In a low-interest environment, it will be more easy to acquire more assets hence improving production or even grow businesses. Liabilities are easily taken care of when there is sufficient money in the economy like low-interest rates (Heminway, 2017). Proprietors can take up loans to service debts to their suppliers or pay unpaid salaries to their employees. With the ease of accessing money businesses start up more easily hence the economy grows steadily. Time is literally money.

Relationship between the concepts of Net Present Value and Shareholder Wealth Maximization

These two concepts are majorly based on the fact that they try to have the present value of an asses or money at its highest potential value. The Net Present Value is the value of a given sum of money presently in comparison to the same sum of money in future in terms of value after it has been invested at compound interest (Muda & Hasibuan 2018). The main goal of the Shareholder Wealth Maximization is to maximize the present value of future returns that are expected by the shareholders in form of dividend payments or sales.

The two concepts aim to greatly improve value of an asset at hand. Investments are highly researched upon so that maximum returns are achieved, similarly in our day to day business indulging we tend to want to invest some small amounts of money expecting the returns will be very big (Shu, Zeithammer & Payne 2016). People want t o buy commodities at a low price and hold onto them until their value becomes higher. Some banks also operate in this way through fixed deposits that have higher returns in the long run. Financial advisers apply these two concepts while advising their clients on how best to use their money. To be able to enjoy money and wealth one needs to have a way to always be able to make the money legally as money is a need that is insatiable.

References

Holston, K., Laubach, T., & Williams, J. C. (2017). Measuring the natural rate of interest: International trends and determinants. Journal of International Economics, 108, S59-S75.

Heminway, J. M. (2017). Shareholder wealth maximization as a function of statutes, decisional law, and organic documents. Wash. & Lee L. Rev., 74, 939.

Muda, I., & Hasibuan, A. N. (2018). Public Discovery of the Concept of the Time Value of Money with the Economic Value of Time. In Proceedings of MICoMS 2017 (pp. 251-257). Emerald Publishing Limited.

Shu, S. B., Zeithammer, R., & Payne, J. W. (2016). Consumer preferences for annuity attributes: Beyond net present value. Journal of Marketing Research, 53(2), 240-262.