Forex Education

Trading industry knowledge. Learn forex trading, investing in stocks, commodities.

  • Home
  • Choose a broker
  • Best Forex Brokers
  • Learn trading
  • Affiliate
  • Contact
  • About us
You are here: Home / Education / Finance education / Present Value

Present Value

by Fxigor

A Concise Guide to Present Value


The present value connotes the value at the moment (current value) of a given sum of money or a cash flow stream at a designated rate of return.
Cash flows in the future go at a discounted rate. When the rate of discount is higher, the present value of the cash flows is lower. We’ll discuss in this article the diverse aspects of present value. Thus, for example, if you have an asset and are promised to get $120 in one year, the present value of the asset is the current value of that asset ($120) today.

To put it differently, the present value implies that the money of the amount is worth greater than that same amount in the future. That is to say, when you get money in the future, it’s not worth that is an equal amount that you get today.

VISIT OANDA - APPLY $10.000 Bonus
BEST BROKERS REVIEWS
avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

Present discounted value

VISIT OANDA - APPLY $10.000 Bonus
avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

BEST BROKERS REVIEWS
free course banner

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

Present discounted value is yet another term to denote the present value. It’s important to note that the present value is either equal to or less than the future value. This is because as money earns earning interest, yet another attribute of the asset, namely time value’ of money emerges.

VISIT OANDA - APPLY $10.000 Bonus

Importance of present value

Each financial asset has a market price. Along with this, it also has a theoretical price. The market price is influenced by sellers and buyers who can affect the price go up or decline on an everyday basis.

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

The market price is the price on which there is consensus on earning in the future and the cash flows of the company that issues the security (asset).

VISIT OANDA - APPLY $10.000 Bonus
BEST BROKERS REVIEWS

VISIT OANDA - APPLY $10.000 Bonus

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

free course banner
fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

How to estimate the present value?

You can estimate the conceptual price by estimating the same value that is projected to earn and the cash flows. This, you can do by using diverse financial analytical frameworks. Of course, the conceptual price estimated by different analysts may vary thanks to the different analytical models they use. Occasionally, the conceptual price may be around the market time. It also can vary from the market price.

VISIT OANDA - APPLY $10.000 Bonus

However, in both cases, the present values depend often on the value of cash flows the investor hopes to receive in the future.

Present value as a concept

Present value is among the most important concepts in financial analysis. You can understand the present value by making a simple question. Would you like to get $1,000 today or get $1,000 one year later?

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

VISIT OANDA - APPLY $10.000 Bonus

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

If you get the $1,000 today, you can invest in good assets. One year later, the mount becomes worth more than $1000.

If your $1000 investment grows to 1,010, in one year, you stand to earn an annual return of one percent. The present value of 1,010 you’re likely to receive one year later from now, discounted at 1 % per year is 1000.

The discount rate in this example is 1%. The present value and discount rate always go together.

When the cash flow in the future is less, the rate of discount is higher. It should be used to determine the present value of the security.

US Treasury bonds, for instance, are said to be immune from the risk of default. And, the return (yield) or discount rate on a 2-year US Treasury bond is 0.559%. This implies that if you discount all the future cash flows involved in 2-year Treasury bonds by 0.559%, the grand total of the discounted cash flows would equal the price. If you’re still not able to reach the concept, you should make additional readings.

Formula to estimate the present value

avatrade ad gold trading
Trillion Dollar Club - Invest & Trade Stocks, Crypto, Forex
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
avatrade ad gold trading

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

To estimate the present value, the following mathematical expression is used:

Future value divided by (1 + rate of discount (r)) to the power of n. This can be mathematically expressed as present value equation:

Present Value = FV * PV factor = Fv / (1+r)^n

Present Value Calculator

An example to illustrate the formula

Investor A plans to decide how much he has to put in the market to earn $100 one year from today with an interest of 5% earned as simple interest is r, and the number of periods would be 1. Period implies time length unit (years).

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

Rate of return and interest rate

When an investor invests $1,000 today, earns a rate of return over the following five years. The present value is estimated according to the rate of interest an investment can accrue.

Thus, if you get $1,000 today and earn interest at the rate of 5% annually, the $1,000 is definitely more than getting $1,000 five from today. If you wait for five years for $1,000 you reap opportunity cost or you may lose out on the return rate for the five-year period.

How do inflation and purchasing power affect the present value?

Inflation is a situation wherein the prices of goods services increase over time. If you get money today, you can buy goods at today’s prices. Inflation will make the piece of a good increase in the future. This is because, as the value of money falls you need to pay a higher amount for the same quaintly of goods and services, which is in turn because the purchasing power of money has become lower.

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm

Present value vs future value

The present value is the current value of a future money sum or stream of cash at a given rate of return. The present value is determined according to the future value and is determined by a discount re of interest that you can ear if invested.

On the other hand, the future value is the value of the current asset a designated date in the future according to the assumed rate of growth.

Simply put, future value shows how worth the investment in the future is whereas the present value shows how much you need in today’s dollars to get back a specific amount in the future.

Conclusion

Understanding the present value will help better to make sound financial investment decisions. While considering any asset, be aware that each of the securities that you come across has the market price and conceptual price (theoretical price). Often the market price is influenced by sellers and buyers. Likewise, the theoretical price is also influenced by applying different methods resulting in varying values. Therefore, you should be careful while estimating the present value. If you cannot, seek expert advice.

  • Author
  • Recent Posts
Fxigor
Fxigor
Trader at Leanta Capital
Igor has been a trader since 2007. Currently, Igor works for several prop trading companies.
He is an expert in financial niche, long-term trading, and weekly technical levels.

The primary field of Igor's research is the application of machine learning in algorithmic trading.

Education: Computer Engineering and Ph.D. in machine learning.

Igor regularly publishes trading-related videos on the Fxigor Youtube channel.

To contact Igor write on:
igor@forex.in.rs
Fxigor
Latest posts by Fxigor (see all)
  • What is the Best Forex Broker in Australia?
  • What is the Best Forex Broker for Spike Trading?
  • How to Backtest Forex Trading Strategy in MT4? – Video & Text Instruction!

Related posts:

  1. Present Value Annuity Factor
  2. Present Value of Growing Annuity
  3. Present value factor
  4. How to Find n in Present Value Formula? – Find n in Future Value Formula!
  5. Present Value of Stock with Constant Growth
  6. Present Value Continuous Compounding
  7. Future Value of Growing Annuity
  8. What is Perpetuity Growth Rate? – Terminal Growth Rate Calculation
  9. What is Equivalent Annual Annuity?
  10. What is the Approximated Yield to Maturity YTM?
  11. Future Value Factor
  12. What Does Perpetuity Mean?

Filed Under: Finance education

Trade gold and silver. Visit the broker's page and start trading high liquidity spot metals - the most traded instruments in the world.

Trade Gold & Silver

Diversify your savings with a gold IRA.

Gold & silver portfolio-building assistance from product professionals.

VISIT GOLD IRA COMPANY If you want to trade stocks try: TRADE IDEAS

fxpro android ad
fxpro android ad
100% bonus hotforex
100% bonus hotforex
trade ETF
supercharged bonus hotforex ad
hfm zerpo spread ad
gold trading hotforex ad
crypto trading capital ad
trade oil ads
cfd stocks trade - ad
avatrade ad gold trading
exness stable spread ad
trade metals ad
trade crypto icm
VISIT OANDA - APPLY $10.000 Bonus

Website categories

Main Forex Info

  • Forex Calendar 2023
  • Forex Holidays Calendar 2023 – Holidays Around the World
  • Non-Farm Payroll Dates 2023.
  • Fed Meeting Schedule 2023. Dates! – FOMC Dates
  • Key Economic Indicators For a Country
  • What is PAMM in Forex?
  • Stock Exchange Trading Hours
  • Forex Calculators – Calculators & Tools for Traders

Main navigation:

  • Home
  • About us
  • The Best Forex Brokers of 2023 (Ranked & Reviewed)
  • Free Funded Forex Account Without Deposit in 2023!
  • Best Forex Affiliate Programs in 2023.
  • Best Forex Brokers by Monthly Traffic of 2023
  • Brokers That Accept PayPal Deposits
  • Forex brokers reviews
  • Investment
  • Education

Forex social network

  • RSS
  • Twitter
  • FxIgor Youtube Channel
  • Privacy Policy
  • Contact us

Spanish language

Spanish language website
Risk Warning: Trading leveraged products such as Forex and CFDs may not be suitable for all investors as they carry a high degree of risk to your capital. Trading such products is risky and you may lose all of your invested capital. Before deciding to trade, please ensure that you understand the risks involved, taking into account your investment objectives and level of experience.

Copyright Forex.in.rs 2007

Privacy Policy

x
x