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  • Lecture 1 (1) .29

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    Discounting involves calculating the present value (PV) of future cash flows by applying interest rates. This process is called discounting, where the market determines the appropriate interest rates to apply to future cash flows to calculate their PV. While the full arbitrage argument is not usually shown, discounting uses interest rates to determine what today's value is for receiving cash flows in the future.

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    Lecture 1(1).29

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    Lecture 1(1).29

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    Discounting involves calculating the present value (PV) of future cash flows by applying interest rates. This process is called discounting, where the market determines the appropriate interest rates to apply to future cash flows to calculate their PV. While the full arbitrage argument is not usually shown, discounting uses interest rates to determine what today's value is for receiving cash flows in the future.

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    7 views1 page

    Lecture 1 (1) .29

    Uploaded by

    kanye
    Discounting involves calculating the present value (PV) of future cash flows by applying interest rates. This process is called discounting, where the market determines the appropriate interest rates to apply to future cash flows to calculate their PV. While the full arbitrage argument is not usually shown, discounting uses interest rates to determine what today's value is for receiving cash flows in the future.

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    © All Rights Reserved
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    of 1

    Discounting

    We say that P is the present value, PV, of the


    future cash flows
    This process of calculating the PV of future CFs
    is called discounting
    The market determines the appropriate
    interest rates, y1 and y2
    We are typically not explicit with the entire
    arbitrage argument

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