Ch 3 - Time Value of Money: an Intro Flashcards Preview

MOS 2310: Finance > Ch 3 - Time Value of Money: an Intro > Flashcards

Flashcards in Ch 3 - Time Value of Money: an Intro Deck (15)
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1

competitive market

market in which the good can be bought and sold at the same price

2

Law of One Price

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

3

arbitrage

The practice of buying and selling equivalent goods to take advantage of a price difference.

4

arbitrage opportunity

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

5

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.

6

interest rate

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

7

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.”

8

present value (PV)

The value of a cost or benefit computed in terms of cash today.

9

future value (FV)

The value of a cash flow that is moved forward in time.

10

discount factor

The value today of a dollar received in the future.

11

discount rate

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

12

timeline

linear representation of the timing of (potential) cash flows.

13

compounding

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

14

compound interest

The effect of earning “interest on interest.”

15

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