4

TIME VALUES

Most securities involve cash flows at different points in time. To compare different securities, the cash flows on each security can be transformed into an equivalent value at the present time (i.e., present value) or at some future point in time (i.e., future value). Then, these present (or future) values can be compared and the best security chosen.

This chapter presents future value and present value computations assuming the same interest rate or discount rate for all periods. This assumption is usually called a flat term (or maturity) structure of interest rates. Later chapters extend the analysis to the case where the interest rates differ by maturity.