: The baseline compensation for the time value of money, often based on government securities.
Different schools of thought provide varying perspectives on why we pay for the use of money: Theory of Interest
: Argues that interest is not a reward for saving, but a reward for parting with liquidity . According to John Maynard Keynes , people prefer holding cash for its safety and flexibility; interest is the premium required to convince them to hold less-liquid assets like bonds. : The baseline compensation for the time value
: The overhead required to manage and service the loan. Key Applications Theories of Interest : The overhead required to manage and service the loan
: Championed by Eugen von Böhm-Bawerk , this theory emphasizes that humans naturally value present goods more than future goods (agio). Interest is the "discount" applied to future satisfaction. Fundamental Mathematical Components