00:02
We have two bonds, both of which will be worth $8 ,000 in bond a, 20 years, bond b, 40 years.
00:10
Our interest rate is 3 .5%.
00:14
We want to know what the bonds are worth today.
00:17
The formula to find that is that our present value, what they're worth today, is the future value divided by 1 plus your interest rate raised to the power of a number of years to maturity.
00:30
So for bond a, it'll be worth $8 ,000 in 20 years at 3 .5 %.
00:41
I'd have $8 ,000 over $1 .999 .000.
00:47
It would be worth about $4 ,020 today.
00:52
Bond b, though, has a longer maturity, so its present value is going to be a good bit smaller because it's growing over 40 years.
01:04
So for bond b, when i raise that denominator to the 40th power, i get 3 .9593, and the value of bond b is about $2 ,021.
01:21
If my interest rate is bigger, both of the present values are going to be smaller.
01:27
For bond a worth 8 ,000 in the future at 7 % in 20 years.
01:38
It's going to be 8 ,000.
01:40
I raised my denominator to the 20th power.
01:45
I get 3 .870 .0...