![]() ![]() In the form of buying bonds from them- weĬould lend the federal government two years overĪny time period at 2%. Whatever reason, we could lend money to the federal government Were to change- if we were to change our assumption. Want to use fancy words- but for all durations out we usedĪ 5% discount rate. Used a 5% discount rate for all- you could say, I don't And let me just draw a lineīetween them, because I got a little bit messy. Streams I did not change in any of the three scenarios. So you get 20 plus 50 dividedīy 1.01, plus 35 divided by 1.05 squared, is equal Rate- but this is an annual rate, so you have toĭiscount it twice- divided by 1.05 squared. One-year rate, because you're not deferring the pleasure of Or the two-year rate? Well of course, we use the Now $50, what do we use? Do we use the one-year rate Something given you today, is the value of it. That in the last two videos, but I clarified it. You'd have to discount it by the one-year interest rate. Year from now? Because if it's a year from now, Zero, just make sure- is that today, is that a It's very important when you'reĭoing this, when they talk about year one, or year That's equal to $99.77, right? That was our first problem. I think that was our first problem, right? So I'll just do it again. So you divide it by 1- so it'sĪ 5% rate, 1.05 squared. And that makes sense, becauseĮssentially you're deferring your money for two years. Going to use the two-year rate, and discount twice. Value of the $110? So we take $110, and we're Present value of the $100? Well, we always know that. What is the present value of the $110? Well, actually, what is the ![]() This is to talk about present value, so let's do that. Option, when you have these varying interest rates. You already know that this option is better than this So you already see, not evenĭoing any present value, this is actually- you can almost One year you're going to get 1.05, and after two years you're That's going to be equal to- let's do it on Up with in two years? Well, remember, this Government for two years and not see your money. That $100 and essentially lend it to the federal government,Īnd in a year they'll give you 1% on it. So what does that mean? Well, let's take the example. One-year rate, let's say that they're only If you were to go out and get a government bond- the So how do you do that? So let's say the risk-free rate, Oftentimes you want to discountĪ payment two years out by a higher value than Up the money, the higher an interest rate you get. That you defer your money, or the longer you lock To be the case, although it's not always the case- the longer We get to keep your money, we'll give you 12%. So let me give you the money for 10 years. You know, I actually don't even need my money for 10 years, We'll give you 7%, because we get to keep your moneyįor two years. Give you a little bit more interest, because we have If we give you the money for two years? So you can keep our money, But we know if you go to theīank and you say, hey, bank, I want to essentially invest inĪ one-year CD, they'll say, oh, OK, one-year CD How long of a period we're talking about. The discount rate is the same thing, no matter ![]()
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