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

value of what will be repaid to the lender.

The second calculation shows what happens if the interest rate rises from 8% to 11%. The actual dollar

payments in the first column, as determined by the 8% interest rate, do not change. However, the present value

of those payments, now discounted at a higher interest rate, is lower. Even though the future dollar payments

that the bond is receiving have not changed, a person who tries to sell the bond will find that the investment’s

value has fallen.

Again, real-world calculations are often more complex, in part because, not only the interest rate prevailing in

the market, but also the riskiness of whether the borrower will repay the loan, will change. In any case, the

price of a bond is always the present value of a stream of future expected payments.

Access for free at openstax.org
C • Present Discounted Value 535
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