Investing and Financial Markets

Mathematical Finance

The Difference Between

Similarities Between

777879

Top Answer

The relationship is that present value is the current value of future cash flows discounted at the appropriate discount rate. Future values are the amount a present value investment is worth after one or more periods. We learn everything we can in the present so we have some of the answers for the future and what we don't know we ask the pros about. The difference between the two is contributed by time. The value of something (an asset) may typically increase over a period of time. $100 that you give me today is not the same as $100 you give a year later. There is an interest (or return) that accrues when you pay me $100 a year later. The future value after n years of an amount P where R is the rate of interest (in percentage) is calculated as P(1+R/100)**n : using compound interest. If R =50 (that is 50% rate of return, I know it is high) and n = 2 years, the future value of P is P*1.5*1.5=2.25P where is today's value. The Present value can be calculated from the future value as P = F/( (1+R/100)**n )

It is necessary to measure the value of an amount that is allowed to grow at a given interest over a period. This is how the future value is determined.

๐

0๐คจ

0๐ฎ

0๐

0The Present Value Interest Factor PVIF is used to find the present value of future payments, by discounting them at some specific rate. It decreases the amount. It is always less than oneBut, the Future Value Interest Factor FVIF is used to find the future value of present amounts. It increases the present amount. It is always greater than one.

Compounding finds the future value of a present value using a compound interest rate. Discounting finds the present value of some future value, using a discount rate. They are inverse relationships. This is perhaps best illustrated by demonstrating that a present value of some future sum is the amount which, if compounded using the same interest rate and time period, results in a future value of the very same amount.

Present value is the result of discounting future amounts to the present. For example, a cash amount of $10,000 received at the end of 5 years will have a present value of $6,210 if the future amount is discounted at 10% compounded annually.Net present value is the present value of the cash inflows minus the present value of the cash outflows. For example, let's assume that an investment of $5,000 today will result in one cash receipt of $10,000 at the end of 5 years. If the investor requires a 10% annual return compounded annually, the net present value of the investment is $1,210. This is the result of the present value of the cash inflow $6,210 (from above) minus the present value of the $5,000 cash outflow. (Since the $5,000 cash outflow occurred at the present time, its present value is $5,000.)

The time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. In particular, if one received the payment today, one can then earn interest on the money until that specified future date. All of the standard calculations are based on the most basic formula, the present value of a future sum, "discounted" to the present. For example, a sum of FV to be received in one year is discounted (at the appropriate rate of r) to give a sum of PV at present. Some standard calculations based on the time value of money are: : Present Value (PV) of an amount that will be received in the future. : Present Value of a Annuity (PVA) is the present value of a stream of (equally-sized) future payments, such as a mortgage. : Present Value of a Perpetuity is the value of a regular stream of payments that lasts "forever", or at least indefinitely. : Future Value (FV) of an amount invested (such as in a deposit account) now at a given rate of interest. : Future Value of an Annuity (FVA) is the future value of a stream of payments (annuity), assuming the payments are invested at a given rate of interest. The time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. In particular, if one received the payment today, one can then earn interest on the money until that specified future date. All of the standard calculations are based on the most basic formula, the present value of a future sum, "discounted" to the present. For example, a sum of FV to be received in one year is discounted (at the appropriate rate of r) to give a sum of PV at present. Some standard calculations based on the time value of money are: : Present Value (PV) of an amount that will be received in the future. : Present Value of a Annuity (PVA) is the present value of a stream of (equally-sized) future payments, such as a mortgage. : Present Value of a Perpetuity is the value of a regular stream of payments that lasts "forever", or at least indefinitely. : Future Value (FV) of an amount invested (such as in a deposit account) now at a given rate of interest. : Future Value of an Annuity (FVA) is the future value of a stream of payments (annuity), assuming the payments are invested at a given rate of interest.

Trending Questions

Give me food and I will live give me water and I will die what am I?

How do you get 1000000 robux for free?

What is 8 divided by 2(2 plus 2)?

Baseball players with 3000 hits 300 home runs and a 300 batting average?

40 thousandths equals how many hundredths?

Who was Hillary Clintons running mate in the 2008 presidential elections?

How many triangles in a pentagram?

Which is greater 1500 mL or 1.5 L?

Hottest Questions

What are the dog days of summer?

What is the toughest academic course according to the Guinness Book of World Records 2011?

Why do so many foods "taste like chicken"?

Who invented Lincoln Logs?

How did chickenpox get its name?

What is doomscrolling?

How did the Wiffle Ball get its name?

Do schools still teach cursive writing?

Previously Viewed

clearUnanswered Questions

WHAT IS THE EXPECTATION ON THE SUBJECT NSTP AND TO THE INSTRUCTOR AND CLASSMATE?

What are the manifestation of a satisfactory selling career?

How does the dwarves music affect Bilbo?

An inverted image is the characteristics of a?

Why is there a need to familiarize yourselves with morphology of fishes?

What is the grammatical name and function of this sentence before the harvest began?

How should the state react the violation of law?

How is medium a factor in representing the filipino identity in a work of art?

Copyright ยฉ 2020 Multiply Media, LLC. All Rights Reserved. The material on this site can not be reproduced, distributed, transmitted, cached or otherwise used, except with prior written permission of Multiply.