We examined two important topics in finance this week: (a) present and future values and (b) security valuation.
What is the importance of present and future values. What factors must be considered when calculating present and future values? What other qualitative factors play into present and future value decisions? Perhaps you have opportunities in your professional life to use present and future values. What are some real or potential applications of these concepts?
Why do bond values go down when interest rates go up? Is this true in the opposite direction?
Present and future values make sure that appropriate treatment is given to future cash flows. A dollar now is worth more than a dollar a year from now. Present and future value concepts ensure that both dollars are treated appropriately.
Factors that must be considered while calculating present and future values include:
1. Future Cash Flows
2. Discount Rate
Both the inputs above however are based on certain assumptions (or qualitative factors). Some of them are listed below:
1. In order to determine cash flows you need to make certain assumptions pertaining ...
This solution explains the present value and future value concepts and the factors that impact those values. The solution further explains some practical applications of these tools. Finally, the solution explains bond prices and how they fluctuate based on interest rates.