the repayment of the face value of the bond. The price of a stock depends on the expected future profits earned

by the firm. The concept of a present discounted value (PDV), which is defined as the amount you should be

willing to pay in the present for a stream of expected future payments, can be used to calculate appropriate

prices for stocks and bonds. To place a present discounted value on a future payment, think about what

amount of money you would need to have in the present to equal a certain amount in the future. This

calculation will require an interest rate. For example, if the interest rate is 10%, then a payment of $110 a year

from now will have a present discounted value of $100—that is, you could take $100 in the present and have

$110 in the future. We will first shows how to apply the idea of present discounted value to a stock and then we

will show how to apply it to a bond.

Applying Present Discounted Value to a Stock
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