Interest rates and cash flows:

The fundamental idea behind inter- temporal cash flow is that people have a preference for the present as compared to the future. A rupee today is much more valuable than a rupee tomorrow. This implies that there is a time value of money. The unit explained this in detail, and then went on to discuss the concepts of compounding and discounting. The difference between simple and compound interest was put forward as also compounding, when compounding was done more than once a year. The present and future values of annuities were explained. The unit then went on to discuss various theories of the determination of the level of interest rates, after a careful discussion of the saving consumption choice with saving seen as deferred consumption. Following this, theories of the explanation of the interest rate were discussed. The unit discussed the classical; the Keynesian; and the loanable funds theories were discussed. Finally the unit explained the concepts of term structure of interest rates and the yield curve. an attempt was made to explain the structure of interest rates.

we consider fixed income securities in a situation where there is no uncertainty. This essentially means we shall be considering  various types of debt. This unit begins with the basic idea that a rupee today is worth more than a rupee tomorrow; however,  there may be situations when you invest something today but get the returns in future. How the future streams of returns is valued in today's terms is what is discussed under the topic 'time value of money'. The unit then goes on to a basic discussion of  cash flows (the unit, as mentioned, considers only deterministic cash flows in the absence of uncertainty), and then explains how the returns on fixed income securities (the interest rate) is determined, and some of the main theories on this topic. Then the unit discusses what is called the term structure of interest rates. This refers to situations when varying terms to maturity of different debts lead to differences in yields. Do not worry. These topics are going to be explained in clear terms in a little while. Finally the unit discusses in detail the methods of valuing stream of cash flows and future interest rates.

Interest rates are a measure of the prices paid by a borrower (or debtor) to a lender (or creditor) for the use of resources during some time interval. The sum transferred from the lender to the borrower is called the principal and the price paid for the use is usually expressed as a percentage of the principal per unit of time (usually per year).