Time Value of Money Flashcards
(10 cards)
What does ‘time value of money’ mean?
A dollar today is worth more than a dollar in the future due to its earning potential.
What is the relationship between present and future value with annual compounding?
FV = PV × (1 + r)^n
What is the ‘cash flow additivity principle’?
Cash flows at the same point in time can be added or subtracted directly.
Why is the cash flow additivity principle important?
It supports the no-arbitrage condition and consistent valuation.
What is an annuity?
A series of equal payments made at regular intervals.
What is the difference between an ordinary annuity and an annuity due?
Ordinary annuity: payments at end of period; Annuity due: payments at beginning.
What is the impact of a higher compounding frequency on future value?
It increases the future value due to more frequent interest application.
What is the implied return in a fixed-income instrument?
The interest rate that equates the present value of future cash flows to the price.
Forward Interest 3y2y represents?
A 2-year forward rate three years from now
