Module 2: Time Value of Money in Finance

Cash flow additivity principle

The principle that dollar amounts indexed at the same point in time are additive.

Dividend payout ratio

The ratio of cash dividends paid to earnings for a period.

Forward price-to-earnings ratio

A P/E caculated on the basis of a forecast of EPS; a stock’s current price divided by next year’s expected earnings.

Hedge ratio

The proportion of an underlying investment position that will offset the risk associated with a derivative position.

Perpetual bonds

Bonds with no stated maturity date.

Perpetuity

A perpetual annuity, or a set of never ending cash flows, with the first cash flow occuring one period from now.

Premium

In the case of bonds, premium refers to the amount by which a bond is priced above its face value. In the case of an option, the amount paid for the option contract.

Price to earnings ratio

The ratio of share price to earnings per share

Terminal value

The expected value of a share at the end of the investment horizon - in effect, the expected selling price.

Zero-coupon bonds

Bonds that do not pay interest during their life. They are issued at a discount to par value and redeemed at par. Also called pure discount bond.