Ch 3 - Time Value of Money: an Intro Flashcards
competitive market
market in which the good can be bought and sold at the same price
Law of One Price
In competitive markets, securities with the same cash flows must have the same price.
arbitrage
The practice of buying and selling equivalent goods to take advantage of a price difference.
arbitrage opportunity
Any situation in which it is possible to make a profit without taking any risk or making any investment.
time value of money
The difference in value between money received today and money received in the future; also,the observation that two cash flows at two different points in time have different values.
interest rate
The rate at which money can be borrowed or lent over a given period
interest rate factor
One plus the interest rate,it is the rate of exchange between dollars today and dollars in the future.It has units of “$ in the future/$ today.”
present value (PV)
The value of a cost or benefit computed in terms of cash today.
future value (FV)
The value of a cash flow that is moved forward in time.
discount factor
The value today of a dollar received in the future.
discount rate
The appropriate rate to discount a cash flow to determine its value at an earlier time.
timeline
linear representation of the timing of (potential) cash flows.
compounding
Computing the return on an investment over a long horizon by multiplying the return factors associated with each intervening period.
compound interest
The effect of earning “interest on interest.”
discounting
Finding the equivalent value today of a future cash flow by multiplying by a discount factor, or equivalently, dividing by 1 plus the discount rate
