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A Summary of Cash Flow Estimations
One of the safest ways is to invest in financial assets with a well defined and projectable cash flow for a given period of time. Cash flow relates to the income one aims at earning by reason of owning a given asset. The income one gets from possessing an asset is estimated through complex models as well as simple solutions. This paper seeks to present a summary relative to the simple estimation of cash flows one can expect from being in possession of US Treasury Securities as a wealth generator.
US Treasury Securities is an asset generally pegged on one fixed rate of interest. This fixed interest rate enables owners of such financial assets to effortlessly forecast future cash flows. The reason why the estimation of this form of financial asset is considered as simple is because the US government has a negligible default probability. This ensures the financial markets regard to it as a stable financial asset.
Considering that an investor purchases a US Treasury Security for 100,000 dollars with a 5% coupon interest rate maturing after five years and annual cash flow from the asset is paid twice a year. Then such an investor can effortlessly calculate what to expect every six months. This is simple calculated by multiplying the principle amount by the interest rate and then multiplying the product by half a year.
Cash flow every six months= $100,000 × 5% × ½ year
Cash flow every six months therefore = $2,500
The investor is thus assured of 2,500 dollars every half year for four and a half years. On the final second half of the year when the US Treasury Security reaches maturity, the investor should expect to receive the principle amount which is 100,000 dollars plus the final fixed interest cash flow of 2,500. By investing 100,000 is this particular asset for five years, the investor will be sure of earning a total of 25,000 from a non depreciating asset.