ch10_sp11 - BCOR 2000 Chapter 10 Brief Intro to Present...

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Unformatted text preview: BCOR 2000 Chapter 10 Brief Intro to Present Value Concepts and Brief Intro to Present Value Concepts and Reporting and Interpreting Bonds Reporting and Interpreting Bonds Brief Intro to Present Value Concepts Time Value of Money Basic Idea $1 today is worth more than $1 tomorrow or some future point in time. How much more? PV = FV (1 + i) n Where PV = Present Value (today) FV = value at some future time i = discount rate, % (sometimes r) n = compounding periods (time, sometimes t), in same space as i Present Value of a Single Cash Flow (single sum) What is the present value of $5,000 received three years from now discounted at 10% per year? Alternatively, how much would you have to invest today to have $5,000 in three years earning 10% compounded annually ? PV = $5,000 (1 + .10) 3 PV = FV (1 + i) n PV = $5,000 / 1.331 = $3,757 Present Value of an Annuity Def Annuity- An even stream of cash flows (same amount every period) What is the present value of $10,000 to be received in each of the next five years discounted at 8%? PV = $10K/(1+ 0.08) + $10K/(1+0.08) 2 + $10K/(1+0.08) 3 + $10K/(1+0.08) 4 + $10K/(1+0.08) 5 Alternatively, use the present value tables , or your financial calculators. Formula: PV(Ann) = PMT x {1 [1 /(1 + i) n ]} / i PV = $10K * PVOA(5,8%) = $10K * 3.9927 = $39,927 Using present value tables Note correspondence between present value of a single cash flow table (Table A.1 @ end of text or p. 579 in second part of book) and present value of an annuity table (Table A.2 @ end book) and present value of an annuity table (Table A....
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ch10_sp11 - BCOR 2000 Chapter 10 Brief Intro to Present...

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