shown in Table C2.

Stream of Payments (for

Present Value (for the

Stream of Payments (for

Present Value (for the

the 8% interest rate)

8% interest rate)

the 11% interest rate)

11% interest rate)

$240 payment after one

year

$240/(1 + 0.08)1 =
$222.20

$240 payment after one year

$240/(1 + 0.11)1 =
$216.20

$3,240 payment after

second year

$3,240/(1 + 0.08)2 =
$2,777.80

$3,240 payment after

second year

$3,240/(1 + 0.11)2 =
$2,629.60

Total

$3,000

Total

$2,845.80

TABLE C2 Computing the Present Discounted Value of a Bond

The first calculation shows that the present value of a $3,000 bond, issued at 8%, is just $3,000. After all, that is

how much money the borrower is receiving. The calculation confirms that the present value is the same for the

lender. The bond is moving money around in time, from those willing to save in the present to those who want

to borrow in the present, but the present value of what is received by the borrower is identical to the present
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