Present Value - PV

AAA

DEFINITION of 'Present Value - PV'

The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.

Also referred to as "discounted value".

INVESTOPEDIA EXPLAINS 'Present Value - PV'

This sounds a bit confusing, but it really isn't. The basis is that receiving $1,000 now is worth more than $1,000 five years from now, because if you got the money now, you could invest it and receive an additional return over the five years.

The calculation of discounted or present value is extremely important in many financial calculations. For example, net present value, bond yields, spot rates, and pension obligations all rely on the principle of discounted or present value. Learning how to use a financial calculator to make present value calculations can help you decide whether you should accept a cash rebate, 0% financing on the purchase of a car or to pay points on a mortgage.

VIDEO

Loading the player...
RELATED TERMS
  1. Net Present Value - NPV

    The difference between the present value of cash inflows and ...
  2. Discount Rate

    The interest rate charged to commercial banks and other depository ...
  3. Actuarial Equivalent

    Actuarial equivalent is generally used for applying some measurement ...
  4. Above Par

    A term used to describe the price of a security when it is trading ...
  5. Present Value Interest Factor - ...

    A factor that can be used to simplify the calculation for finding ...
  6. Discounting

    The process of determining the present value of a payment or ...
RELATED FAQS
  1. What's the difference between EaR, Value at Risk (VaR), and EVE?

    Earnings at risk (EaR), value at risk (VaR) and economic value of equity (EVE) are measures used to assess potential value ... Read Full Answer >>
  2. How do you calculate present value in Excel?

    Present value is the current value of an expected future stream of cash flow. The concept is simple. For example, assume ... Read Full Answer >>
  3. How do investors calculate the present value of a future investment?

    Present value is the current worth of an expected future cash flow. Calculating the present value lets an investor gauge ... Read Full Answer >>
  4. Why is the time value of money (TVM) an important concept to investors?

    The time value of money (TVM) is an important concept to investors because a dollar on hand today is worth more than a dollar ... Read Full Answer >>
  5. How does the privatization of a publicly traded company work?

    Going private, also known as "going dark," is the process by which a formerly publicly traded company enters into a buyout ... Read Full Answer >>
  6. What are the disadvantages of using net present value as an investment criterion?

    While net present value (NPV) calculations are useful when you are valuing investment opportunities, the process is by no ... Read Full Answer >>
  7. What's the difference between net present value and internal rate of return? How ...

    Both of these measurements are primarily used in capital budgeting, the process by which companies determine whether a new ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    What is Present Value?

    Present value tells us how much a future sum of money is worth today, given a specified rate of return. This is an important financial concept based on the principle that money received in the ...
  2. Investing Basics

    Calculating The Present And Future Value Of Annuities

    At some point in your life, you may have had to make a series of fixed payments over a period of time - such as rent or car payments - or have received a series of payments over a period of time, ...
  3. Bonds & Fixed Income

    Accelerating Returns With Continuous Compounding

    Investopedia explains the natural log and exponential functions used to calculate this value.
  4. Bonds & Fixed Income

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  5. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  6. Forex Education

    Time Value Of Money: Determining Your Future Worth

    Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation.
  7. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  8. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  9. Economics

    Understanding the Fisher Effect

    The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
  10. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center