Explain the concept of present value as if you were explaining it to a child?

Got asked this at an interview and still sort of stumped on how to best explain it - also without using (money or dollars / CF / technical terms). In regards to bonds.

Anyone have any good responses?

Comments (5)

 
Best Response
Jan 31,2018

What you need to do is demonstrate that you understand that receiving something today is worth more than receiving the same exact thing tomorrow. So, let's say you've promised your child they could get a Happy Meal and milkshake on Saturday, but now it's Wednesday, and your child already wants that Happy Meal and milkshake. You tell the child that they can either wait until Saturday or they can get just the Happy Meal today. That Happy Meal today is the present value of the future stream of what you promised your child.

Maybe someone else has a better example.

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Feb 28,2018

I got asked a very similar question during a first-round phone interview for Moelis Boston: Explain the time value of money in simple terms.

I kept emphasizing that the key point is that the value of something today is worth more than the value of that same thing in the future. I used examples as well, but the analyst kept saying that my answer wasn't clear/complete. To this day, I still don't know what he was looking for.

 
Jan 31,2018

Son you are a failure for receiving these low marks. First you lose your basketball game, now you can't even explain NPV. Go to your room before I kick your ass.

 
Jan 31,2018

Let's say there's an apple tree. You can go today and pick the apples off the tree at the peak of apple harvest season. Or, you can wait a few days and pick the apples, which by then, will have either become closer to rotten or brown. By the end of the week, you will still have an apple, question is would you want the apple now or later?

 
Jan 31,2018