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# Sess02 new - Lecture 2: The Time Value of Money Reading:...

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Fin3715 – Fall 07 - Kayhan 1 Lecture 2: The Time Value of Money Reading: RWJ Chapter 5 Chapter 6 Outline: Future values Present values

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Fin3715 – Fall 07 - Kayhan 2 Some Basic Assumptions Three assumptions about people’s preferences: For now: 3. People prefer more money to less money 4. People would rather have money sooner than later (impatience) For later: 7. People prefer certainty to uncertainty (risk aversion)
Fin3715 – Fall 07 - Kayhan 3 Time Lines Show Timing of Cash Flows Tick marks at ends of periods, so Time 0 is today; Time 1 is the end of Period 1; or the beginning of Period 2. r (or r t ) is the discount rate [or interest rate, cost of capital, opportunity cost (of capital), required return, expected return]. 0 1 2 3 4 r % CF 0 CF 4 CF 3 CF 2 CF 1 Period

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Fin3715 – Fall 07 - Kayhan 4 A few examples 0 1 2 3 4 8 % 80 Year 0 1 2 3 4 1 % 100 Month 0 1 2 3 4 r 1 80 Year 100 100 -60 80 -20 r 2 r 3
Fin3715 – Fall 07 - Kayhan 5 The Time Value of Money Key point: The value of \$1 depends on when it is received.

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## This note was uploaded on 05/06/2008 for the course FIN 3715 taught by Professor Stephens during the Spring '08 term at LSU.

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Sess02 new - Lecture 2: The Time Value of Money Reading:...

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