Lecture_Sept_26_TVM - ORIE 350 September 26, 2006 Time...

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    ORIE 350 September 26, 2006 Time Value of Money
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    Time Value of Money Interest is the cost of borrowing money or the return from lending money. If you lend someone $5 today and you receive $6 one year from now, the difference of $1 represents the interest paid on the amount borrowed. Interest rates are usually stated as annual rates. If you borrow $100 from the bank at 6% per annum (per year), payable in one year, you must pay the bank $100 + $6 (0.06 × $100) or a total of $106 at the end of the year.
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    Interest Rates The interest rate applicable in an economic transaction is affected by the perceived risk or probability of non-payment in the transaction. A bank may lend money to a low risk customer at 7.5%, but a high risk person may have to borrow money at the pawn shop at 36% or more.
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    An interest rate has three components: 1. A risk-free component based on an economic concept called the marginal productivity of capital. Many economists believe this rate is about 3 or 4
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This note was uploaded on 04/05/2009 for the course ORIE 350 taught by Professor Callister during the Summer '08 term at Cornell University (Engineering School).

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Lecture_Sept_26_TVM - ORIE 350 September 26, 2006 Time...

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