The current value of an investment is called the present value of an investment. It is basically the value of an investment in today’ dollar values.


So if you have 1000 dollars with you today then your present value is 1000 dollars.


Like future value, there are two factors which determine the present value of an investment:

• Rate of interest
• Number of compounding periods

‘Rate of interest’ is self explanatory. It is basically the rate at which your investment will be earning interest.

‘Number of compounding periods’: We know that compounding interest is when interest also earns interest rather than just the principal. The time interval between which interest is added to your investment is called number of compounding periods. So if you have an account which earns ‘an interest of 10% compounded quarterly’ it means that the interest is added to your account 4 times in a year.

The formula for calculating present value is:

Present Value = future value / (1+ i)^n


i= interest rate per compounding period. So if your account earns ‘an interest of 12% compounded quarterly’ means i = 3%.
n=number of compounding periods

Present Value formula is really useful to determine how much investment you need to start with to reach a desired investment level in the future. So if you want 10,000 dollars in 5 years time and if your bank gives you a ‘5% interest compounding quarterly’, then you can use the formula to determine how much principal you need to begin with today to reach your desired investment goal.

Let’s work through an example - Actually lets use the same example as the one in the Future Value example. Assume you have need 1215 dollars in 2 years time and your investment earns 10% semi annually. So how much principal do you need?

Present value = 1215 / (1+.05)^4
1000 * (1.2155) = $1215.51

So to reach your investment goal of 1215 dollars in two years time you need an investment of 999.95 today.

The higher the compounding periods the more interest you earn and hence lesser the present value of your investment.

Click here to use the free Present Value Calculator

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Topics: Financial Definitions |

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