CHAPTER 1

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Discounting, Present Value, and the Yield Curve

Before embarking on a discussion of bank valuation and value-based management, it is necessary to review some fundamental tools used in financial economics. These include discounting, analysis of the yield curve, and statistics. Readers who are familiar with these tools can go directly to Chapter 4.

The first tool needed for valuation is discounting or present value. To make the presentation easier and allow readers to develop an intuitive understanding of this tool, this chapter starts with a simple numerical example. This is followed by general formulas. The chapter discusses

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