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Present value: Difference between revisions
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The value of something now. Of particular interest when that “something” is a payment obligation that falls due in the [[future]]: for example, the repayment of a [[loan]]: The [[present value]] of my promise to pay you £10 in a year’s time is something less than £10. | {{g}}The value of something now. Of particular interest when that “something” is a payment obligation that falls due in the [[future]]: for example, the repayment of a [[loan]]: The [[present value]] of my promise to pay you £10 in a year’s time is something less than £10. | ||
Why? | Why? | ||
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*For a third, inflation. what £10 buys today is likely to be more than what £10 buys in a year. | *For a third, inflation. what £10 buys today is likely to be more than what £10 buys in a year. | ||
Think of it another way: imagine you loaned me £10, for a year, without interest. You would never do that, right? This is why a [[zero-coupon bond]] issues at a discount. it doesn’t pay interest, so instead you buy at a discounted price which implies the interest rate you would be prepared to pay. | Think of it another way: imagine you loaned me £10, for a year, without interest. You would never do that, right? This is why a [[zero-coupon bond]] issues at a [[discount]]. it doesn’t pay interest, so instead you buy at a discounted price which implies the interest rate you would be prepared to pay. | ||
Careful book-keepers therefore ''[[discount]]'' the value of [[future cashflow]]s back, by reference to an implied interest rate, to find their [[present value]]. | Careful book-keepers therefore ''[[discount]]'' the value of [[future cashflow]]s back, by reference to an implied interest rate, to find their [[present value]]. | ||
{{ | {{sa}} | ||
*[http://www.quantopia.net/the-discount-curve-zcbs-and-the-time-value-of-money/ Good arrticle on the time value of money] | *[http://www.quantopia.net/the-discount-curve-zcbs-and-the-time-value-of-money/ Good arrticle on the time value of money] | ||
*[[Zero-coupon bond]] | *[[Zero-coupon bond]] | ||
*[[Time value]] | *[[Time value]] | ||