16 Valuation · 16.1 Valuation principles and terminology

16.1.6 Rates of interest, capitalisation and capital value

Capital value = net annual income × years' purchase (YP); for a perpetual income YP = 100 ÷ rate of interest, and the rate itself rises with risk — so the safer the income, the lower the rate, the higher the YP and the higher the value.

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Key terms

  • rate of interest
  • yield
  • rate of return
  • risk
  • security of capital
  • liquidity
  • capitalisation
  • capital value
  • net income
  • years' purchase
  • YP in perpetuity
  • 100 divided by rate
  • deferred perpetuity
  • present value of Re 1
  • remunerative rate
  • accumulative rate
  • sinking fund
  • single rate
  • dual rate
  • gilt-edged securities
  • ground rent yield
  • rule of 72
  • term and reversion

What this note covers

  1. Core factsFoundation
  2. ExplainedStandard
  3. DeeperAdvanced
  4. Mains writingMains writing
  5. Common trapsFoundation
  6. Quick revisionFoundation

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