Thread: Present value formula.

1. You own three 180-day discount instruments, each of which has a face value
of $500,000. You plan to sell one every 30 days to fund monthly expenditures of
$490,000 associated with the start-up phase of a capital project. Specifically, you plan
to sell one instrument when there is 150 days to run to maturity, another instrument
when there is 120 days to run to maturity and the final instrument when there is 90
days to run to maturity.

- Describe the nature of the discount instrument and the associated present value
formula.

Basically I don't rly understand the formula for this, any starting help or something would help... thanks!

I think what you are asked for is a discounted present cash value. since there is no interest rate given in this formula, the NV would be:

500.000/(1+i) + 500.000/(1+i)^2 + 500.000(1+i)^3

where i is your monthly interest rate. Therefore it is somewhat a monthly annuity. However, the problem description is very brief. Usually, a discount instrument is seen like a zero-bond with disagio. This is because they only have to be paid back when the discount period is over. It is basically like a capital market loan for start up. Venture capital most of the time.