THE MECHANICS OF PRESENT VALUE — WHAT IS A DISCOUNT RATE?
Before we move on to a detailed discussion of what each of the five steps in using Present Value entails, I want to be a little bit more rigorous in describing the term “Present Value” and then go through the basics of a Present Value calculation. Critical to understanding that discussion will be the concept of a discount rate, so let’s spend some time talking about discount rates and what Present Value really means.
Present Value Defined—Savings Bonds and What “Discount Rate” Means
The next few paragraphs have a tiny bit of math and are more quantitative than we will generally get. While Present Value math is not at all necessary to understanding the rest of the book, there ...