Would you rather receive $100 now or $100 in ten years time? If you are a rational person you would probably say now, but why? – In finance we attribute this rationality to the time value of money. Money now is worth more now than in the future. Or in finance we say: The present value of $1 is worth more than the future value of $1.
Why is this? This relates to the uncertainty or risk of a future cash flow. That is uncertainty in not receiving that cash, the uncertainty in the value of the cash in the future (inflation) as well as the risk premium you demand for giving up your present spending power. This uncertainty is called the discount rate. The discount rate is not fixed. It can vary depending on your situation and the specific risk of your investment. Obviously you would place a higher discount rate on providing a loan to an addicted gambler then a family member. This explains why treasury bonds (government bonds) can demand a lower interest rate than a finance company specializing in sub-prime loans. Investors have more certainty that they will receive the future cash flow from a government bond then the particular finance company.
hey bro, just wondering did you mean to leave a rhetorical question/example at the end of the article? Seemed a little weird.