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
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
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
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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