stock vs flow -  

• stock - instantaneous amount owned by a firm
  • ie. capital
• flow - variable inputs/outputs
  • amount needed/used over a time period
• capital, if not used, can gain interest
  • firms calculate how much capital in the future is worth today
  • determines whether or not it's a good investment
• future flow of income worth less today than at that time

present discounted value (PDV)  

• future dollar value = M(1+R)n
  • M = amount of capital now
  • R = interest rate
  • n = time period (usually in years)
• present value = M / (1+R)n
• stream of payment w/ smallest present value is best

bond - contract where borrower (issuer) pays a stream of income to lender (holder)  

• gov't could issue bond where they would pay $100 every year for 10 years
  • results in $1000 total after 10 years
  • but remember that $100 paid before 10 years can still have time to grow
  • lender (bondholder) would pay less than that $1000 in the beginning
  • that $1000 has present value of: 100/(1+R) + 100/(1+R)2 + ... 100/(1+R)9 + 100/(1+R)10

net present value = -C + profit1/(1+R) + ... + profitn/(1+R)n  

• profit can be negative if firm is operating in a loss
• risk premium paid in form of higher yield for riskier bonds/stocks (ie. tech stocks) and lower yield for more stable/dependable bonds (ie. gov't bonds)