When you calculate the the present value of a bond, you are calculating the present value of future cash flows. The future cash flow needs to be discounted to remove the interest. The rate used to discount the cash flow is called the discount rate. For example, if the time value of money is 10% per year, receiving $2 at the end of one year has a present value of $1.82 [2/(1 + 10%)1]. The
. present value of receiving a single $2 at the end of two years is $1.65 calculated as [1/(1 + .10)2] or [1/1.21].
