Time Value of Money: An Introduction

These flashcards cover key concepts related to the time value of money, interest rates, and valuation principles essential for understanding financial decision-making.

Time Value of Money

The difference in value between money received today and money received in the future.

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 Rate

The appropriate rate to discount a cash flow to determine its value at an earlier time.

Interest Rate

The rate at which money can be borrowed or lent over a given period.

Compounding

Computing the return on an investment over a long horizon by multiplying the return factors associated with each intervening period.

Discounting

Finding the equivalent value today of a future cash flow.

Law of One Price

In competitive markets, securities with the same cash flows must have the same price.

Arbitrage Opportunity

Any situation in which it is possible to make a profit without taking any risk or making any investment.

Interest Rate Factor

One plus the interest rate; it is the rate of exchange between dollars today and dollars in the future.

Timeline

A linear representation of the timing of cash flows.

Compound Interest

The effect of earning 'interest on interest'.