Final answer:
A dollar received today is worth more than a dollar received tomorrow due to the time value of money, which considers factors like inflation, earning capacity, and investment potential. Inflation causes money to lose value over time, which is advantageous for borrowers but disadvantageous for lenders. Changes in interest rates also impact bond prices and the future value of money.
Step-by-step explanation:
The time value of money implies that a dollar received today is worth more than a dollar received tomorrow. This principle recognizes that due to potential earning capacity, inflation, and certainty factors, money available in the present has greater value than the same amount in the future. In the context of inflation, money loses value over time as prices increase, which means lenders are worse off receiving dollars that are worth less because of inflation, while borrowers benefit because they repay loans with money that has depreciated. Additionally, if money is received today, it can be invested, earning interest over time, which would not be possible if it were received at a future date. Hence, considering the present value of money, a bond issued at a specific interest rate would have a present value equal to the loan amount received, but its future value would be influenced by the interest rate and inflation over time. Moreover, changes in interest rates can affect the price of bonds; typically, when interest rates rise, bond prices fall, and vice versa.