A basic concept in finance maintaining that a currency unit today is not worth the same currency unit tomorrow or next year, etc. For example, a dollar today is not worth a dollar in the future. It also implies that any amount of money to be received in the future is uncertain. The concept involves different values of money over time based on two techniques: discounting (converting or translating a future value to a present value) and compounding (converting or translating a present value to a future value). These two techniques involve interest to ensure that the time value of money and risk (uncertainty) are factored in.
In this respect, interest represents the compensation for the opportunity cost of funds (price of time) and the uncertainty associated with future payments (price of risk). The price of time stands for what could have been done with the money elsewhere, while the price of risk is compensation for bearing risk between now and the future.
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