Question

1. Define PV, FV, PVA, FVA, and PV . using an example with close relevance to you. The example may be professionally (e.g., issuing bonds and stocks of your corporation) or personally (e.g., investing your retirement assets) related to you.

Answer 1

1)	PV:
	Refers to the Present Value of a Future
	Lump sum to be received when discounted
	at the appropriate rate.
	The formula for finding PV of a lump sum is
	PV = FV/(1+r)^n
	where, r = the discount rate and n = the # of
	years or periods
	Example:
	I have an obligation to make a payment of
	$5000 to my friend after 5 years. If I wish to
	settle the amount today I need pay only its
	PV when discounted at a rate agreeable to
	my friend.
	If such rate is 5%, the amount to be paid
	today = 5000/1.05^ 5 =	$         3,918
2)	FV:
	FV is the opposite of PV and represents the
	future value of a lump sum today.
	FV = PV*(1+r)^n
	Example:
	I have made a deposit of $5000 in a bank
	which pays interest at 5%, compounded
	annually. If the maturity is 5 years, the
	value of the deposit with interest will be
	5000*1.05^5 =	$         6,381
3)	PVA:
	PVA means PV of annuity. Annuity is series
	of equal payments for a specified number
	of periods.
	The PV of annuity = [(1+r)^n-1]/[r*(1+r)^n]
	I needed an annuity of $500 (yearly) for 25 years
	for which I approached an Insurance co.
	The company asked me to pay the PV of the
	annuity, the discount rate being 3% p.a.
	The PV of annuity or the amount payable today to purchase the annuity = 500*(1.03^25-1)/(0.03*1.03^25) =	$         8,707
4)	FVA is the opposite of PVA.
	It is given by the formula:
	FVA = [(1+r)^n-1]/r
	Example:
	I plan to save $500 for 5 years at the end of each
	year. If I can earn an interst rate of 3% compounded
	annually, the FV of this annuity will be:
	500*(1.03^5-1)/0.03 =	$         2,655