00:01
So here we have a stream of payments, right? and we're getting the stream of payments that we're getting is 5 ,000 and 5 ,000 and 5 ,000 plus dot, dot.
00:11
And the key phrase here is at end of each year.
00:19
So this means that we don't really receive the first payment until one year is over, right? so the very first payment we receive is already going to be worth less.
00:29
And the amount that it's worth less is proportional.
00:32
To the what we call the discount rate, right? the idea being is that when the interest rate is high, the money today is very valuable because it can earn a high rate of interest.
00:43
When the interest rate is low, there's not much difference between money today and money tomorrow because the interest we would earn from getting the money today is pretty immaterial.
00:53
So we need to discount all these future payments proportional to the interest rate, adjusting for the number of times we could have earned the interest.
01:04
So if we had this first payment a year earlier, we could have earned one plus our interest.
01:09
If we had the second payment two years earlier, we could have earned one plus our interest twice, and so on and so on and so forth...