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Quiz 3 :
Present Value

Quiz 3 :
Present Value

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Explain the basis for the present-value formula (Equation 4). Tell why each term looks the way it does. If the rate of discount is zero, how does the formula simplify?
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An equation can be used to calculate the present value of almost any financial security. For example if you receive $100 in one year $150 in two years and $200 in 3 years and at interest at 4% the present value of your payments is the present value of 100 in one year plus the present value of $150 in 2year plus the present value of $200 in 3 year.
img If you are evaluating set of payments of F 1 in one year F 2 in two years, and so on out to
img in N years where the rate of discount is
img This is a present value formula
img This is used to calculate the present value of any financial security. In case of a single payment a higher future amount will yield a higher present value also a higher rate of discount or discount factor will yields lower present value.
If the rate of discount were smaller say zero percent then the discount factor also would be smaller (1.00) in this case the present value is
img Here the present value is p = 104 and future value is 104. Discount is zero.

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What is the relationship between present value and the rate of discount for a given future value?
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The amount of money you need to invest today to yield a given future amount. The method of present value is you compare follows of money received or paid at different times. The concept of present value is based on two main ideas 1. How much money you have available at different times by borrowing and services.2.interest is earned on past interest?
For example , if you have $100 to pay that you want to save for the future you will deposit in bank account then you can earn a 4 percent annual interest rate.
If you deposit $100 in a bank Account for 2 years at 4 percent annual interest rate, in the first year you can earn $4 in first year by interest and have $ 104 at the end of the year. In the second year you can earn $108.16 at the end of the year
img The amount by which a future value is divided to obtain its present value, which equal
img for an amount to be received or paid in N year, where
img is the rate of discount
For example: you invest $1000 in a security that pays interest of 8 percent each year.
The value of your $1000 investment is
img For 10 years your investment has grown to only
img

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Would you believe a banker who told you that if you invested $1,000 in her bank, you would be a millionaire someday? How can this happen?
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If we invest the value of $1000 in security that pays interest in 8 percent each year you mayn't de too impressed after five years because value of your $1000 investment is
img After two years our interest has grown to only
img So, we won't be get much on that investment. Here no chance to become a milliner. If we keep our investment for a longer time compounding begins to matter after 25 years our investment is work
img After 50 years it is work
img If we preferred the long term investment on $1000 than we will become milliners at compound interest so we believe the banking point of view

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What is the relationship between present value, future value, and the interest rate in the case of a perpetuity?
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What does it mean to amortize a loan?
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Is it better (fi nancially) to buy or lease a car?
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Why are security prices and interest rates inversely related?
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How should you determine the appropriate rate of discount to use in the present-value formula?
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Suppose that I buy a 10-year bond today for $1,000 and that the interest rate when the bond is issued is 5 percent. The day after I buy the bond, the market interest rate on 10-year bonds rises to 7 percent. If I keep the bond for the full 10 years until it matures, what is the bond's average annual return?
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What information do you need to be able to negotiate an automobile lease? Do you need any other equipment, such as a calculator, fi nancial tables, or anything else?
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Why is the monthly payment on a car lease lower than the monthly payment on a car loan for the same car and the same time to maturity?
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