Time value of money: present value made simple

Would you rather have 10,000,000 soʻm today or 11,000,000 soʻm in a year? The answer is not obvious, and it is one of the most useful questions in personal finance. The idea behind it, the time value of money, explains how deposits, bonds and share valuations work, and it helps you compare offers that pay different amounts at different times. This guide explains present value and discounting with simple examples.

Why money today is worth more than money later

A soʻm you have today is worth more than a soʻm promised in the future, for three reasons:

• It can earn a return. Money in hand can be put in a deposit or a bond and grow.
• Prices rise. With inflation, the same amount buys less later.
• Promises carry risk. A payment in the future may be late, smaller than promised or not made at all.

So a future payment has to be larger than today's amount to be worth the same. How much larger depends on the rate of return you could earn meanwhile, and that rate is the key input in every calculation below.

From today to the future: future value

If you invest an amount today at a yearly rate, its future value after one year is the amount multiplied by (1 + rate). After several years you multiply again for each year, because each year's return also earns a return. That is compound interest.

An illustrative example: 10,000,000 soʻm at 10% a year becomes 11,000,000 soʻm after one year and 12,100,000 soʻm after two.

From the future back to today: present value

Present value runs the same calculation backwards. It asks: how much would I need to invest today, at a given rate, to have a certain amount in the future? That amount today is the present value of the future payment, and the rate used is called the discount rate.

Present value = future amount ÷ (1 + rate) raised to the number of years.

With the same illustrative 10% rate:

• 11,000,000 soʻm in one year is worth 11,000,000 ÷ 1.1 = 10,000,000 soʻm today.
• 1,000,000 soʻm in three years is worth 1,000,000 ÷ 1.1³, about 751,300 soʻm today.
• 1,000,000 soʻm in five years is worth about 620,900 soʻm today.

The further away the payment and the higher the rate, the less it is worth now. At 20% instead of 10%, 1,000,000 soʻm in five years is worth only about 401,900 soʻm today.

Choosing the discount rate

The discount rate is the return you could get elsewhere on money of similar risk. For a safe payment, a reasonable choice is what a government bond or a deposit at a sound bank pays for a similar period. For a riskier payment, such as the future profits of a company, investors use a higher rate to reflect the chance of disappointment.

There is no single correct rate, and the answer to a comparison can change with it. That is why it helps to try two or three rates and see whether the conclusion holds.

Comparing offers: a lump sum now or more later

Suppose you are offered either 10,000,000 soʻm today or 12,000,000 soʻm in two years. Which is better?

• At a 10% discount rate, the later payment is worth 12,000,000 ÷ 1.21, about 9,917,000 soʻm today. Taking 10,000,000 now is slightly better.
• At an 8% discount rate, it is worth 12,000,000 ÷ 1.1664, about 10,288,000 soʻm today. Waiting is better.

The same two offers give different answers depending on what you could earn meanwhile. When deposit rates are high, money now tends to win; when they are low, larger later payments become more attractive. Remember the third reason too: if the later payment is uncertain, use a higher rate.

Comparing deposits: how often interest is paid

Deposit offers with the same headline rate can be worth different amounts. An illustrative comparison of two deposits at 20% a year for one year:

• Interest paid at the end: 10,000,000 soʻm becomes 12,000,000 soʻm.
• Interest added to the deposit every month: each month earns 20% ÷ 12 on a growing balance. After a year the balance is about 12,194,000 soʻm, an effective rate of about 21.9%.

If the monthly interest is paid out to you instead of being added, the result depends on what you do with it. Spent, it is worth the same as 20% simple interest. Reinvested, it compounds. When comparing deposits, ask how and when interest is paid and whether it is added to the balance. As of September 2026, interest on bank deposits is not taxed for individuals under Article 378, item 13 of the Tax Code, so for deposits the comparison can be made before tax.

Bonds are present value in action

A bond's price is the present value of its future coupons and face value, discounted at the market's yield. When market yields rise, those future payments are discounted more and the price falls. When yields fall, the price rises. That is the whole reason bond prices move against interest rates. Bond yield, coupon and price shows the calculation for a bond.

The same logic lies behind valuing a company: a share is worth the present value of what the business will pay its owners in the future. The uncertainty of those payments is why share valuations vary so much.

Everyday uses

• Instalment offers. A purchase "without interest" in instalments is worth less to the seller than a cash price; a discount for paying cash upfront may be worth taking.
• Loan offers. Comparing the present value of all the payments with the amount you receive shows the true cost of a loan.
• Saving goals. Present value tells you how much you need to set aside today for a goal in the future at a given rate.

This article is for education only and is not investment advice. Investing in securities involves risk, including the loss of money you invest.