FIN301_Ch4 - Chapter 4 Introduction to Valuation: The Time...

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Chapter 4 Introduction to Valuation: The Time  Value of Money
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2 Chapter Outline Present Value (PV) Future Value (FV) Interest rate (r) Number of periods (t)
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3 Future Values (1)  FV = PV(1 + r) t FV = future value PV = present value r = period interest rate, expressed as a decimal T = number of periods Future value interest factor = (1 + r) t When we talk about discounting, we mean finding the present value
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4 Future Values (2) Effects of Compounding Simple interest (interest is earned only on the original principal) Compound interest (interest is earned on principal and on interest received) Consider the example FV with simple interest FV with compound interest
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5 Figure 4.1
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Future Values (3)   Suppose you had a relative deposit $10 at 5.5% interest 200 years ago. How much would the investment be worth today? What is the effect of compounding? Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 15 years. How much would you have at the end of 15 years
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This note was uploaded on 05/06/2008 for the course FIN 301 taught by Professor Andelin,stevenle during the Spring '07 term at Pennsylvania State University, University Park.

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FIN301_Ch4 - Chapter 4 Introduction to Valuation: The Time...

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