Final answer:
The PV of a series of cash flows at an 8% interest rate is calculated using present value calculations for each cash flow. The example includes a two-year bond to illustrate the concept. You must sum the individual present values to find the total present value of the cash flows.
Step-by-step explanation:
To determine the present value (PV) of a stream of cash flows with a market interest rate of 8% per annum, one must perform present value calculations for each cash flow at its specific time period and then sum them up to get the total present value. These calculations use the present value formula, which discounts future cash flows back to their value today based on the given discount rate, in this case, 8%. Without the actual stream of cash flows provided in the question, we can't complete the exact calculation, but to illustrate this concept, consider a two-year bond with a principal of $3,000 and an annual interest rate of 8%, providing $240 in interest each year. Using an 8% discount rate, the present value of the first year's interest payment is $240/(1+0.08), and the present value of the second year's interest payment and the return of principal is ($240+$3,000)/(1+0.08)^2.
The present discounted value (PDV) is different for amounts received at different times because the further out a cash flow is, the less it's worth today due to the time value of money. This principle is central to valuation in finance and investing. After performing the necessary present value calculations using the cash flows and discount rates, the final step is to add these present values together to find the total PDV of the bond or series of cash flows.