Fundamental Concepts in Financial Management
What is “discounting,” and how is it related to compounding? How is the future value equation (2-1) related to the present value equation (2-2)?
How does the present value of a future payment change as the time to receipt is lengthened? As the interest rate increases?
Suppose a U.S. government bond promises to pay $2,249.73 three years from now. If the going interest rate on three-year government bonds is 4 percent, how much is the bond worth today? How would your answer change if the bond matured in five rather than three years? What if the interest rate on the five-year bond were 6 percent
rather than 4 percent?
How much would $1,000,000 due in 100 years be worth today if the discount rate were 5 percent? If the discount rate were 20 percent?
