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Learn about the following:
The time value of money. How financial products can be split into cash flows. How discount factors are used. How present value is used in pricing and valuation. Why valuations change. What causes interest rates to change. How traders can profit from their expectations.
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1. Present value
2. Deal pricing and valuation
3. How trade values change
4. Why do interest rates change?
5. Summary
6. Test
18th September 2009
A dollar paid to you now is worth more than one paid to you in the future. Why? Because if you had a dollar now you could invest it and earn interest. Simple enough but exactly how much is money worth today when it is paid in the future? To answer that you need to know about discounting.
19th September 2009
Present value (PV) calculations are commonly used in financial markets. They are particularly relevant to over-the-counter derivatives. Their use includes pricing and marking-to-market transactions. PV uses a discount factor to convert future money into today's money. The sum of any deal's cash flows in present value terms is referred to as the net present value (NPV). From a dealer's perspective this is important. Transactions with positive NPVs equate to profit and those with negative NPVs losses. The following is an introductory explanation to zero coupon discount factors. The examples use USD rates where the instruments pay interest on an actual/360 day count basis.
Learn about the following: What basis point value is. How it is calculated. What influences basis point value. How firms use basis point value. The strengths and weaknesses of basis point value.