Present Value and Future Value

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Present ValueandFuture Value
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THE BASICS
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10,000 Inheritance
If there is a set of values where we would
clearly take the money now
10,000
10,000
10,000
There MUST be a point in between where wewould
be indifferent between now or later
10,010
10,000
10,000
11,000
10,000
50,000
50,000
10,000
And another set where we would clearly wait.
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10,000 Inheritance
10,000
11,000
1,000
.10(10,000)
10,000
11,000
10,000(1.10)
11,000
PV(1i) FV
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10,000 Inheritance
10,000(1.10)
11,000
12,100
10,000(1.10)
?
11,000(1.10)
12,100
11,000(1.10)
10,000(1.10)(1.10)
12,100
10,000(1.10)2
12,100
PV(1i)n FV
PV FV/(1i)n
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Present ValueANNUITIES
ORDINARYANNUITIES
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1
1
1
1
1
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1/(1.10)1
.90909
1/(1.10)2
.82645
1/(1.10)3
.75131
1/(1.10)4
.68301
1/(1.10)5
.62092
3.79078
Or, since this is an ORDINARY annuity (annuity in
arrears), we can look up the factor in the
appropriate table.
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Future ValueANNUITIES
ORDINARYANNUITIES
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1.00000
1.10000
1.21000
1.33100
1.46410
6.10510
This is a future value of an ordinary annuity
factor.
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Bonds
Face Value (Principle) The amount to be paid at
maturity
Coupon/Stated/Contract Rate The percentage of
the face value to be paid each year as an
interest only payment
Yield/Market Rate The rate of interest the
market demands to earn, considering risk,
maturity, alternative investments, etc.
Life Number of periods until maturity
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Bonds
Face Value (Principle) 10,000
Coupon/Stated/Contract Rate 8
Yield/Market Rate 10
Life 5 Years, Annual Payments
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800 (1.10)1
727.27
800 (1.10)2
661.16
800 (1.10)3
601.05
800 (1.10)4
546.41
800 (1.10)5
496.74
3,032.63
or more simply 800(3.79078) 3,032.63
10,000(1.10)5
6.209.21
9,241.84
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Cash
9,241.84
Discount on Bonds Payable 758.16

Bonds Payable 10,000.00
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And that concludesHow to calculatethe value
ofBonds