Market-Determined Interest Rates, and the Time Value of Money

  • Moorad Choudhry
  • Didier Joannas
  • Richard Pereira
  • Rod Pienaar
Part of the Finance and Capital Markets Series book series (FCMS)

Abstract

For any application the discount rate used is the market-determined rate. This rate is used to value capital market instruments. The rate of discount reflects the fact that cash has a current value and any decision to forgo consumption of cash today must be compensated at some point in the future. So when a cash-rich individual or entity decides to invest in another entity, whether by purchasing the latter’s equity or debt, he is forgoing the benefits of consuming a known value of cash today for an unknown value at some point in the future. That is, he is sacrificing consumption today for the (hopefully) greater benefits of consumption later. The investor will require compensation for two things; first, for the period of time that his cash is invested and therefore unusable, and secondly for the risk that his cash may fall in value or be lost entirely during this time. The beneficiary of the investment, who has issued shares or bonds, must therefore compensate the investor for bearing these two risks. This makes sense, as if compensation was not forthcoming the investor would not be prepared to part with his cash.

Keywords

Income Peri Olate Rium 

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Selected Bibliography and References

  1. Blake, D. Financial Market Analysis, McGraw Hill, 1990.Google Scholar
  2. Fisher, I. Theory of Interest, Macmillan, 1930.Google Scholar
  3. Lee, T. Economics for Professional Investors, 2nd edn, Prentice Hall, 1998.Google Scholar
  4. Choudhry, M. Fixed Income Markets, Wiley Asia, 2004.Google Scholar

Copyright information

© Moorad Choudhry, Didier Joannas, Richard Pereira and Rod Pienaar 2005

Authors and Affiliations

  • Moorad Choudhry
    • 1
  • Didier Joannas
    • 2
  • Richard Pereira
    • 3
  • Rod Pienaar
    • 4
  1. 1.KBC Financial ProductsUK
  2. 2.Hong KongChina
  3. 3.Nomura plcUK
  4. 4.UBS AGUK

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