This lesson examines the term structure of interest rates and the relationship between different yield curves, as well as the time value of money and discounted cash flow analysis. Understanding the yield curve is fundamental to treasury as it informs decisions about borrowing and investment across different time horizons .

7.1 The Yield Curve

The term structure of interest rates explains why yields differ for different maturities . The ACT syllabus covers:

• Zero coupon, forward and par instruments .

• Zero coupon, forward and par yield curves .

• The no-arbitrage relationships between different yield curves .

The yield curve is a fundamental tool for treasury professionals as it informs decisions about the cost of funds, borrowing, and investment across different time horizons.

7.2 Time Value of Money and Discounted Cash Flow

Discounted Cash Flow (DCF) is hugely important and present in every aspect of financial evaluation . The ACT syllabus requires the ability to calculate present values of single and multiple future cash flows in order to undertake appropriate and accurate investment appraisal . Key concepts include:

• Identifying when cash flows occur .

• Present values and discounting .

• Annuities and perpetuities .

• Net present value including the use of periodic and simple annual rates .