The value today of a future cash flow, found by discounting at a suitable rate. It is the basis of bond, swap and derivative pricing.
Where you will meet it
Present value comes up in 36 learning outcome notes across the FRM syllabus.
A few of them:
Insurance Companies and Pension Plans FRM Part I · Financial markets and products
“The pure premium P equates the present value of expected premiums to that of expected benefits.”
Calculating and Applying VaR FRM Part I · Valuation and risk models
“A long forward on a non-dividend stock equals a long position in the stock plus borrowing the present value of the delivery price.”
Credit Risk Management FRM Part II · Credit risk measurement and management
“It then chooses the route with the best present value net of costs: restructuring where the business is viable, enforcing security, selling the claim to a distressed investor or litigating.”
VaR Mapping FRM Part II · Market risk measurement and management
“Cash-flow mapping discounts every coupon and principal payment at its own spot rate and allocates each present value to the neighbouring vertices, preserving value and risk.”
GARP does not endorse, promote, review, or warrant the accuracy of the products or services offered by Charta Learning, nor does it endorse any pass rates claimed by Charta Learning. Further, GARP is not responsible for any fees or costs paid by the user to Charta Learning. FRM® and GARP® are registered trademarks owned by the Global Association of Risk Professionals, Inc. The questions, explanations and study notes are written for this product and are not GARP curriculum material.