Concept of present value

Suppose someone promises to pay you $100 in some future period T. This amount of money actually has two different values: a nominal value of $100, which is simply a measure of the number of dollars that you will receive in period T; and a present value (sometimes referred to as a present discounted value), roughly defined to be the minimum number of dollars that you would have to give up today in return for receiving $100 in period T.

Stated somewhat differently, the present value of the future $100 payment is the value of this future $100 payment measured in terms of current (or present) dollars.

The concept of present value permits financial assets with different associated payment streams to be compared with each other by calculating the value of these payment streams in terms of a single common unit: namely, current dollars.

A specific procedure for the calculation of present value for future payments will now be developed