Category: Financial Economics

Single Period Random Cash-Flow [Basic Concepts]

An investment instrument that can be bought and sold is frequently called an asset. Suppose you purchase an asset at time zero, and one year later you sell the asset. The total on your investment is defined to be Very often, the term return is used for total return. The rate of return is These two …

Fixed Income Securities [Basics]

Fixed-Income Securities Basic Concepts An interest rate is a price, or rent, for the most popular of all traded commodities—money. The one-year interest rate, for example, is just the price that must be paid for borrowing money for one year. Markets for money are well developed, and the corresponding basic market price—interest—is monitored by everyone who …

Internal rate of return [IRR]

Internal Rate of Return Internal rate of return is another important concept of cash flow analysis. It pertains specifically to the entire cash flow stream associated with an investment, not to a partial stream such as a cash flow at a single period. The streams to which this concept is applied typically have both negative and …

More on Present and Future Value

Present and future value of streams Previously we discussed the impact of interest on a single cash deposit or loan; that is, in a single cash flow. We now extend that discussion to the case where cash flows occur at several time periods, and hence constitute a cash flow stream or sequence. The Ideal Bank An …

Present Value and Discounting

Present Value and Discounting Basic Concepts Interest is often termed as the time value of money. The basic idea of interest is quite familiar.  If you invest ₹1000 in a bank account that pays you 8% interest per year, then at the end of one year you will have in your account the principal or original …