Lecture 4

Lecture 4 - FIN 311 Instructor Syed Walid Reza Lecture 4...

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FIN 311 Instructor: Syed Walid Reza Lecture 4 Spring 2016
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Today: Review and Chapter 5 Review of lectures Chapter 5: Time value of money 2
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Review Lecture 3: questions? Other questions? 3
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Time Value of Money You have $100 with two investment options: a. Keep it with a bank at 10% interest rate for 1 year b. Give it to me and I return $109 in 1 year Here, Present value (PV) = $100 Future value (FV) = $109 & … ? Formally, PV is the value of money at time 0 FV t is the value of money at time t 4
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Time Value of Money You have $100 with two investment options: a. Keep it with a bank at 10% interest rate for 2 years b. Give it to me and I return $118 in 2 years 5
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Time Value of Money t = 0 t = 1 -$100 a. $110 b. $109 t = 2 a. $121 b. $118 a. $10 b. $ 9 a. $21 b. $18 Principal + Interest Interest 6 Problem 1 Slide 4 Problem 2 Slide 5 x (1.1) x (1.1) FV 1 FV 2
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Time Value of Money You have $100 with two investment options: a. Keep it with a bank at 10% interest rate for 30 years b. Give it to me and I return $370 in 30 years With simple interest, calculation is easy How can we simplify the calculation for compound interest?
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