FUTURE VALUE

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Future Value

The future value is the worth, at a specific point in the future, of an amount that is to be received or paid today.

Through the process of compounding, a current investment will “grow” or increase in value over time.
Consider this example:

A new $10,000 motgage note or trust deed at 10% (per annum) interest with a one-year maturity will pay $11,000 at the end if one year. Thus $11,000 is the future value of your $10,000 investment today.

Present value is what the value of the future cash flows are worth  today.

Example:

A seller of a mortgage note can  sell the full amount, a fraction, or a portion of his interest in the mortgage note.  The seller then assigns the whole or a fraction of his interest of the remaining period of the mortgage note.  A document known as the assignment of interest spells out the terms and conditions involved.  For that document, the present value of the future cash flows are calculated.  the document will spell out what cash flow the purchaser of the note is buying.  The purchaser of the note has to figure out what the value of that mortgage is worth today.

To do that, he does a calculation called the present value of the future cash flow.  The term sounds complicated, but basically it means what the cash flow is worth today.

Mortgage note was used in this example but is also true in most notes.

Another way to look at present value is as  follows:

Present value is just the opposite of future value. It is the worth today, of an amount to be received (or paid) in the future.  In the example given in future value the $10,000 beginning amount is the present value of the future $11,000 assuming that the investment is to earn 10% per annum.