This presentation walks us through the basic building blocks of TVM and probability theory at a “high level."
In today’s world of complex structured securities, valuing these securities can seem a daunting task. However, if one stands back and decomposes these securities it can be seen that, like a “plain vanilla” bond, they can be easily understood and valued based on a couple of simple mathematical concepts. The foundation for this valuation approach is basic time value of money (TVM) overlaid with probability theory. With this knowledge the approach to valuing very simple or very complex securities becomes demystified.
This presentation walks us through the basic building blocks of TVM and probability theory at a “high level." It then looks at several examples from straight bonds to mortgage-backed securities to common equities, and demonstrates that all follow the same conceptual valuation approach. In a market where some participants thrive on making securities appear complex, the ability to decompose them along these basic lines greatly assists us in assessing their risk and return characteristics.