Thursday, March 8, 2012

Pure Time Value of Money - Concept Brief

 Index of concepts
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11. Ka to Kz
24. Xa to Xz

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Concept Definition and Explanation

 
Rate of return on a security consists of three components.
 
1. Pure time value of money
2. Inflation premium
3. Risk premium
 
Pure time value of money is the interest rate demanded by an investor for postponing his consumption and making available capital to a borrrower.
 
If the lender anticipates inflation during the term of loan he demands an extra return to compensate for the loss in purchase power of money.
 
Risk premium arises due to uncertainty of interest and principal repayment.

 

 
References:
Reilly, Frank and Keith Brown, Investment Analysis and Portfolio Management, 7th Edition, Thomson-South Western, 2003
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Originally posted in knol
http://knol.google.com/k/narayana-rao/pure-time-value-of-money/ 2utb2lsm2k7a/ 970

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