The value of a payment depends on when it is made.

a. Future value is the present value of an initial investment times one plus the interest rate for each year you hold it. The higher the interest rate, the higher the future value.

b. Present value is equal to the value today of a payment made on a future date.

i. The higher the payment, the higher the present value at a given interest rate.

ii. The higher the interest rate, the lower the present value of a given payment.

iii. The longer the time until the payment is made, the lower the present value of a given payment at a given interest rate.

iv. For a given increase in the interest rate, the present value of a promised payment falls more the further into the future the payment is to be made.

v. When computing present value, the interest rate and the time until the payment is to be made must be measured in the same time units.