ABSTRACT
This chapter discusses the risk-free financial instruments. For example, the capital is deposited in a risk-free bank account or invested in government bonds. All financial decisions must take into account the basic idea that money has its time value. In order to compare or add different amounts of money, one must place the amounts at the same point in time, called the focal date. The mathematics of finance deals with dated values. In general, one compares the dated values by the definition of equivalence. One of the main types of a cash flow stream is an annuity. There are many examples of annuities in the financial world: mortgage payments on a home, car loan payments, payments on rent, dividends, payments on instalment purchases, etc. The yield curve is an instrument used for analysis of the bond market. The shape of the yield curve reflects the market’s expectation of where interest rates are heading.
