Tuesday, December 18, 2007

Economic Terms and Concepts

The Present Value of a future cash flow discounted at X% is the amount of money you would need to invest today earning interest compounded annually at X% to accumulate that future amount. It answers the question "How much do I have to invest now to end up with that future sum if I earn the discount rate?"

A bond's Yield to Maturity is the one discount rate that equates the present value of the cash flows (interest payments and principal) to the price.

A security's Current Yield is its annual income divided by its current price. For a bond it is the coupon interest divided by the price. For a share of common stock, it is the annualized dividend divided by the price.

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