The time value of money is closely linked with the inflation rates. High inflation rates may significantly influence the future value of money as discount rates increase proportionally. Hence it may be necessary to determine the correlation between the interest rate environment and inflation. Even though most sources state that low-interest rates lead to high inflation and vice versa, it may not be as explicit as it seems. Low-interest rates make borrowing cheap and significantly increase money circulations in the market. People tend to borrow more money, increasing the demand for goods and services. Such an increase leads to higher prices, which causes inflation and lowers the time value of money.
However, low-interest rates make entrepreneurship more attractive as the threshold of the entrance is low and risks are minimal. Existing businesses borrow money and expand, whereas new organizations emerge. In an ideal world, such development would lead to booming economic growth, and production rates would meet the demand. Under such circumstances, inflation could decrease or at least stay unchanged. Nonetheless, in reality, low-interest rates do not considerably affect existing corporations. Even though it makes business more attractive, it mainly attracts people with insufficient knowledge and experience in the field, often leading to failure and bankruptcy. Therefore, low-interest rates lead to high inflation and consequently to increasing discount rates, which lower the time value of money.
As already mentioned, interest rates significantly influence asset value. Low-interest rates make borrowing more attractive and increase purchasing power. People may buy such assets as housing at higher rates, leading to great demand and short supply. Such imbalance may cause rising prices, and the value of assets may increase. Liabilities may also grow, as a low-interest rate may be highly attractive for businesses. As mentioned before, it may be beneficial in terms of economic growth but requires rational management.