Many people usually have this question but somehow, the many resources online can’t answer it well. I shall try my best to explain it in this post.
Time Value of Money
The first thing to understand, is this concept called the Time Value of Money. In other words, $1 today is worth more than $1 in the future. Or, $1 in the future is worth less than $1 now.
So, how much is $1 now worth in the future? To answer this question, we will need to know how much can this $1 grow risk-free. In other words, without any risk, how much interest can this $1 gain and grow into.
This interest rate that in question is called the risk-free rate. We usually use the central bank’s prime lending rate for this. The prime lending rate or prime rate, is the rate at which the country’s bank charges the …