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Unformatted text preview: 05:35 Cash Flows Cash payments to a holder of a security. Different debt instruments have different kinds with different timing. Present Value= Present Discounted Value A dollar in the future is less than a dollar todaydiscounting the future. Present value of future sum, discounted to the present. Todays value of a payment to be received in the future when the interest rate is equal to i. Based on the commonsense notion that a dollar paid to you one year from now is less valuable to you than a dollar paid to you today.time value of money You can deposit a dollar in a savings account today and earn interest and have more than a dollar a year from now. Allows us to figure out todays value (price) of a credit (debit) market instrument at a given simple interest rate i by adding up the individual present values of all the future payments received. PV = (CF) / ( i) PV= present (todays) value CF= future cash flow (payment) i = interest rate Discounting the Future Process of calculating todays value of dollars received in the future. Working backward from future amounts to the present. Future cash flow divided by the interest rate Four Credit Market Instruments Simple Loan Simplest kind of debt instrument....
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- Spring '08