Definition
Present Value
Present value is what a future sum of money is worth today, calculated by 'discounting' it at an appropriate rate to reflect the time value of money.
Because money can earn returns, a sum due in the future is worth less than the same sum today; present value tells you how much less. The higher the discount rate or the longer the wait, the smaller the present value. It is the tool for comparing options that pay out at different times — for example, weighing a lump sum now against instalments later.
Practically, present value helps you decide whether a future payout, a pension option, or a delayed bonus is worth more or less than cash in hand today, and it is the foundation of valuing bonds, annuities and any stream of future cash flows.
Related terms
- Time Value of MoneyThe time value of money is the principle that a rupee today is worth more than a rupee in the future, because today's rupee can be invested to earn returns.
- Future ValueFuture value is what a sum of money invested today will grow to by a future date, given an assumed rate of return and compounding.
- AnnuityAn annuity is a financial product that pays a regular income stream, typically for life, in exchange for a lump sum — used mainly to secure income in retirement.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.