Time Value of Money (TVM)

• "Money now is worth more than money later"

Risk and Return

• "No pain, no gain"
• High risk implies high returns

Efficiency, Arbitrage, and Law of One Price

• Investors are not stupid; they will always go for the cheaper option
• All identical products will thus have exact same price
• Else, arbitrage happens - a no risk, high return investment, which is "illegal"

Transaction Costs and Information

• We assume, unrealistically, that markets are perfect, contracts cost nothing to enforce, and everyone has the same information

Rate of Return

• Profit earned on an investment (e.g. loan, bond, stock)