Accounting and Finance >> Time Value of Money
Present Value and Future Value
- The Present Value is the current monetary value.
- The Future Value is the monetary value at some point in time in the future.
The value of a "dollar today" is its Present Value
In an investment, the initial principal invested would be its present value. If you are the borrower on a loan or mortgage, the present value would be the initial amount of money borrowed or outstanding on the debt.
The value of a "dollar tomorrow" is its Future Value
In an investment, this would be the total of your principal plus the interest and gains you have made at the end of the investment period. As a borrower, if your loan is to be entirely paid off, the future value of your loan would be zero. This would be the case in a loan that is fully amortizing.
When starting with the Present Value of a dollar today and you want to calculate the Future Value of a dollar tomorrow, the percentage rate at which a dollar grows is called the Interest Rate
The process of working backward from the Future Value of a dollar tomorrow to calculate its Present Value today is known as Discounting
The percentage rate used to discount a future value back to its Present Value is called the Discount Rate
. Since discounting is often used to analyze investments, the discount rate may also be referred to as the return
or rate of return
of an investment.