Time Value of Money and Bond Valuation Vocabulary

Vocabulary flashcards covering discounting, compounding, fixed income instruments, loan amortization, and valuation models based on the lecture transcript.

Discounting

The process of starting with a future cash flow and moving back in time to calculate its present value today, which is the opposite of compounding.

Compounding

The process of moving cash flows forward in time by multiplying a cash flow today by $(1 + r)$ across periods to determine its future value.

Risk Premium

The extra return demanded by investors on top of compensation for delayed consumption to compensate for risks such as cash flow volatility or price inflation.

Continuously Compounded Rate

A theoretical return rate assumed to be applied continuously over infinitesimally small periods, where compounding forward is calculated using $e^{R_{CC} \times t}$.

Discount Factor

A multiplier below one (when rates are positive) calculated as $\frac{1}{(1 + r)^t}$ used to bring a future cash flow back to its present value today.

Zero Coupon Bond

A financial security that pays no regular interest coupons during its life and only pays a single par (also called face, principal, or nominal) value at maturity.

Yield to Maturity (YTM)

The return baked into a bond given its current market price, representing the required rate of return demanded by investors.

Amortizing Loan

A loan structure in which the principal balance is paid down over time through periodic payments that combine varying portions of interest and principal.

Market Reference Rate (MRR)

A short-term benchmark interbank rate (such as NIBOR, SOFR, or SONIA) that floats and resets periodically as the base interest rate for floating rate notes.

Quoted Margin

The fixed percentage added to a market reference rate in a floating rate note to compensate investors for the issuer's credit risk above the banking system.

Basis Point

A unit of measure equal to one hundredth of a percent ($0.01\%$), where $100$ basis points equal $1\%$ whole percent.

Perpetuity

A financial instrument or stream of equal payments with no stated maturity date that continues indefinitely, valued today as $\text{PV} = \frac{\text{PMT}}{r}$.

Gordon's Growth Model

A constant growth valuation model for an infinite cash flow stream, where present value today is calculated as $\text{PV}_0 = \frac{\text{CF}_1}{r - g}$, requiring required return $r$ to exceed growth rate $g$.

Two-Stage Growth Model

A valuation method that models an initial finite period of supernormal cash flow growth ($G$) followed by a transition to a lower, perpetual sustainable growth rate ($g$).