present value
finance
Also known as: PV
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Present value (PV) is the value of an expected sum of money discounted by compounding interest rates to the present day. The idea of present value is based on the time value of money, which states that money today is more valuable than the same amount of money in the future, because todayâs money can be investedâin bonds or certificates of deposit (CDs), for example. The earnings can grow increasingly faster over longer investment periods thanks to the power of compounding returns.
Given the future value (FV) of an expected future income, the present value of that sum of money can be calculated using the following formula:
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Where r is the rate of return, which is the same as the interest rate for the money invested, and n is the number of investment periods (usually years).
For example, if you expect to receive $1,000 five years from now, and the going rate for a five-year Treasury note is 5%, the present value of that $1,000 is $783.53. (Treasury securities are frequently used as the prevailing interest rate in PV calculations.)
For more on compounding and a present value calculator, read about the time value of money.
Pop quiz! Test your knowledge of compound interest, dollar cost averaging, retirement accounts, and more.
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