Time Value of money


  • perfect market assumption 
    • no difference in opinion 
    • same relevant information is all know to market participants 
    • certainty of facts or same opinion shared by all regarding uncertanties 
    • no taxes 
    • no taxes and no government/ regulatory interface 
    • no transaction costs 
    • zero costs in any market transaction 
    • no big sellers/buyers
    • no transaction is big enough to influence price 
  • rate of return: cash flow and rate of return from 0 to period 1 - cash flow /cash flow 
  • capital gains - cash flow 1- cash flow 0 
  • compound rate of return: future value of period  n = present value of period n*
  • present value = future value/ ( 1+ required rate of return per period)^number of periods
  • net present value = present value + future valu / (1+ required rate of return)^n-1/ rquired rate of return per period 
  • present value of unity 
  • annuity payment *{1-1/(1+required rate of return per period)^number of periods}/ required rate of return per period 

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