Present Value Of Future Payments

Written by Jacey Harmon
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When you are receiving a payment stream from a source like an annuity, it is important to understand the value of future payments. This is important information to have when planning for future expenses and lifestyle. It is also important to know the value of your future payments when you are considering selling your payments to a third party.

A person will often need to sell future payments in order to gain access to immediate funds. Reasons for this may vary from wanting to buy a house or needing to pay immediate bills. A seller will request bids from funding companies, those who engage in buying payments, for the payments that are to be sold. Businesses will make an offer to the seller that is less than the total of the future payments. Unless you are informed about the present value of your payments, you might not make the best decision.

Components to Calculating Present Value of Future Payments

To figure the value of your future payments, you need to take into consideration how far the payments go out into the future. The further out a payment is expected, the lower value it will have in present terms. For example, $1 to be paid in two years at current interest rates of three percent has a present value of $.94. The same $1 to be paid in ten years at the same interest rate has a present value of $.74.

You will also need to take into consideration current interest rates. High interest rates will equal lower present value and low interest rates will equal higher present value. For example, the value of $1 to be paid one year into the future with interest rates running around three percent has a present value of $.97. The same $1 to be paid in one year at interest rates of four percent has a present value of $.96. Knowing the present value of future payments will allow you to accept better bids for your payments.

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