4. Present value

Finding a present value is the reverse of finding a future value.

Discounting is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future.

Which of the following investments that pay will $9,500 in 14 years will have a lower price today?

The security that earns an interest rate of 5.50%.

The security that earns an interest rate of 8.25%.

Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 5.40%. Assuming that both investments have equal risk and Erics investment time horizon is flexible, which of the following investment options will exhibit the lower price?

An investment that matures in seven years

An investment that matures in six years

Which of the following is true about present value calculations?

Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

Other things remaining equal, the present value of a future cash flow increases if the investment time period increases.