Time Value of money: An introduction

9 important questions on Time Value of money: An introduction

What does the law of one price state?


states that in competitive markets, the same good or securities
must have the same price.

What is meant with arbitrage opportunity?


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

What is another discription for time value of money?


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.
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What is the present value(PV)?

When we express the value in terms of dollars today

What is the future value (FV)?


If we express it in terms of dollars in the future

What is a time line in financial terms?

a linear representation of the timing of the expected cash flows.

What is the formula to find n?

Years to double= 72/(interest rate in percentage)

We must discount in an earlier point of time. How do we  do that?


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.

How do you quantify the cost and benefits

Any decision in which the value of the benefits exceeds the costs will increase the value of the firm

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