Page 58 - CFA - Day 1 & 2 Course Notes

LOS 6.e: Calculate and interpret the Session Unit 2: The Time Value of Money
future value (FV) and present value (PV)

of a single sum of money, an ordinary

annuity, an annuity due, a perpetuity (PV
only), and a series of unequal cash flows.

Present Value of a Single Sum

Example: PV of a single sum
Given a discount rate of 9%, calculate the PV of a $1,000 cash flow that will be received in 5 years.

To solve this problem, input the relevant data and compute PV.

N = 5; I/Y = 9; FV = 1,000; CPT → PV = –$649.93 (ignore the sign)

This relatively simple problem could also be solved using the following PV equation:
PV=1,000 / (1+0.09)5=$649.93

On the TI, enter 1.09 [yx] 5 [=] [1/x] [×] 1,000 [=].
The PV computed here implies that at a rate of 9%, an investor will be indifferent between $1,000 in five years
and $649.93 today. Put another way, $649.93 is the amount that must be invested today at a 9% rate of return
in order to generate a cash flow of $1,000 at the end of five years.