What concept indicates how the rate of interest impacts the value of an investment over time?

The concept that illustrates how the rate of interest impacts the value of an investment over time is known as the time value of money. This principle is foundational in finance and economics, as it asserts that a dollar today holds more value than a dollar in the future due to its potential earning capacity. This is primarily influenced by the interest that can be accrued over time.

When considering investments, the time value of money helps investors understand how interest rates can affect the future worth of their investments. For instance, if you invest a certain amount of money today at a specific interest rate, that money has the potential to grow over time, resulting in a higher future value. Conversely, the time value of money also highlights the concept of discounting, where future cash flows are converted back to their present value, illustrating that money earned in the future is less valuable than the same amount received today.

In summary, the time value of money encompasses the critical relationship between interest rates and the growth of investments over time, helping individuals and businesses make informed financial decisions.