Question

Describe some practical applications of using present or future value calculations.

Where do current interest rate levels sit against historical norm? What factors have contributed to having interest rates at current levels?

Answer 1

Practical Application of present or future value calculations:

a) Present value can be used to calculate NPV of the project to decide whether to invest in a project or not

b) Future value can be used in personal finance calculations to calculate how much balance will be available in future by investing in an annuity or lumpsum amount

c) Present value concept is used by insurance & pension companies in actuarial science domain to calculate the prospective value of reserves to ensure solvency

Current interest rates sit at very low levels as compared to historical norms. This is because of the heightened risk aversion amongst investors & the high demand for government debt (especially in USD). The result of such a strong buying pressure is that yields (interest rates) have started entering into negative zone. Moreover the central banks across the world are cutting interest rates to prevent steep depreciation of their domestic currency