- Present discounted value
- Present discounted value is the amount you should be willing to pay now for a stream of payments you expect to receive in the future.
- Face value
- Face value is the amount the borrower agrees to pay the holder of a bond when the bond reaches its maturity date.
The three ideas behind putting a price on the future
Can you name the three ideas you need to put a value today on money that arrives later?
Each one is needed to decide whether money arriving later is worth what it costs now.
A discount rate is the interest rate used to turn future payments into present values, set by the return available elsewhere plus a premium for risk.
Can you think of an example?
A saver who can earn 5% a year on a safe gilt should discount a start-up's promised profits at more than 5%, because the start-up may never pay. At 15%, £115 promised next year is worth £100 today.
Net present value is the present value of a project's future benefits minus the present value of its costs, so a positive figure means the project pays.
Can you think of an example?
A café pays £1,900 now for a coffee machine that adds £1,050 of profit at the end of each of the next two years. At 5% the profits are worth £1,000 + £952 = £1,952 today, so the net present value is about £52.
The social time preference rate is the discount rate HM Treasury tells government departments to apply to the future costs and benefits of a public project.
Can you think of an example?
The Green Book sets it at 3.5% a year in real terms for the first thirty years of an appraisal, 3% for years 31 to 75 and 2.5% after that, so effects a century away still count for something. An independent review for the Treasury in June 2026 recommended cutting the first-thirty-year rate to 3%.