The First Difference Property of the Present Value Operator

Stephen A. Buser, Bjarne Astrup Jensen

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Abstract

This paper identifies a fundamental relationship between the present value of a given cash flow and the present value of the period by period change in that cash flow. The new relationship is shown to be highly useful for the identi.fication of analytic expressions for present value and related measures such as duration and convexity; expressions that continue to play an instructive role by helping to relate the quan­titative outcomes of numerical calculations to the driving forces behind those cal­culations. This new method applies only simple arithmetic operations and avoids the use of differential calculus and advanced series summation in order to derive these analytic results.
We apply the method to a variety of nontraditional cash flows, including cash flows with linear growth or decay, cash flows that are subject to different true effects for dividends and capital gain, and cash flows that are projected to exhibit cyclical variation over time.
Original languageEnglish
Article number1750012
JournalQuarterly Journal of Finance
Volume7
Issue number4
Number of pages41
ISSN2010-1392
DOIs
Publication statusPublished - 2017

Keywords

  • Present value
  • First difference property
  • Recursive calculation
  • Duration
  • Convexity

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