Present value
What an amount arriving later is worth today, once the cost of waiting is taken off.
Where you will meet it
Present value appears in 51 learning outcomes on the CFA syllabus. A few of them:
- Outline the main families of equity valuation model and what each gains or gives up
“Present value models, such as dividend discount and free cash flow models, estimate intrinsic value from forecast cash flows discounted at a required return.”
- Explain how a lessee accounts for leases
“A lessee recognises a right-of-use asset and a corresponding lease liability for substantially all leases, measured at the present value of the lease payments.”
- Work out a bond's price from a given discount rate
“A bond's price is the present value of its cash flows: each coupon and the principal, discounted at the required yield.”
- Work out what one cash flow is worth today
“Present value runs the future-value relationship backwards: PV = FV / (1 + r)^n.”
Learn it properly
- Bond pricing and yield to maturity: how a bond is valued
- NPV vs IRR: which capital budgeting rule to trust
- Time value of money explained: present value, future value and annuities
- Time value of money calculator
Practise it
Practise present value until it is automatic: questions that explain every wrong option.
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