Today’s value of a cash flow that is to be received at some point in the future PV

Present value vs Future value
The amount to which a current deposit will grow over time
Annual compounding
Periodically compounding
Continuously compounding
Discount rate used to discount cashflows in future to PV
FV
Opportunity cost forgo by choosing a course of action
nominal r.f = real
Required rate of return minimum rate must receive to accept the investment
r.f + inflation p
Lump-​sum (single cashflow)
Nominal risk-​free rate
Real risk-​free rate
required ror =
Inflation premium
nominal r.f + RP
Components Default risk premium -> Required rate of return = Real risk-​free rate 
+ Inflation premium + Default risk premium + 
Interest rate Liquidity premium + Maturity premium
Types of cashflow Premiums (compensate for bearing risk) Liquidity premium
R1: Time value of money

Maturity premium
Types of cashflow

first cash flow (PMT) that occurs one period  Ordinary annuity
from now (t1)
no reinvestment of interest
Simple interest
based on principal amount
first cash flow (PMT) that occurs immediately (t0) Annuity due
Annuity (Series of equal cashflow)

reinvestment of interest

first cash flow (PMT) that occurs one period from  Compound interest
now (t1) Perpetuity based on principal amount + accumulate interest

never-​ending sequential cash flows

Effective annual rate (EAR) the rate investors actually realize as a result of compounding
m: the frequency compound/year
Periodically compounding Type something
Type something Series of unequal cashflow

m→∞
Continuously compounding
Type something

Usage: The cash flow additivity principle can be used to solve problems  Cashflow additivity rule
with uneven cash flows by combining single payments and annuities.