Lecture2 - LECTURE 2 TIME VALUE OF MONEY: COMPOUND...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
L ECTURE 2 T IME V ALUE OF M ONEY : C OMPOUND I NTEREST , P RESENT & F UTURE V ALUES Reading: Chapter 3, sections 3.1-3.4, Chapter 4 Sections 4.1-4.2 Chapter 5, Section 5.1 Practice Problems: Lecture 2 online, due next time Objectives 1. Explain and understand compound interest 2. Compute the present or future value of any cash flow using any compounding interval 3. Understand the concept of Net Present Value and how it relates to the Law of One Price 4. Solve for present value, future value, interest rate or number of periods, given the values of the other thre 5. Derive an effective annual compound rate of interest (also called APY) from an annual percentage rate of interest (APR)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
M OVE - IN S PECIALS When I moved into my apartment three years ago, my landloard had a “move-in special.” Rent on my apartment is $1350/month However, because of the “move-in special,” the landlord offered to lower my rent to $1125 per month for six months (which was my lease term). Alternatively, I could live rent-free for the first month, and then pay $1350 per month for the remaining five months of my lease. Which option would you take? How can we think of this as a saving/investment problem?
Background image of page 2
I NTRODUCTION TO THE TIME VALUE OF MONEY : Easy: Choice between $100 and $110 right now. Not so easy: Choice between $100 today and $110 in 1 year. Let’s apply the Law of One Price : How can we determine the current market price of the right to receive $110 in 1 year? Many business and personal decisions involve a trade-off of cash flow between points in time. What are some examples? We need market interest rates and the tools of interest rate mathematics to compare bundles or streams of cash flows over time. Present Value Æ Compound interest Æ Future Value Present Value Å Discounting Å Future Value
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
C ALCULATING F UTURE V ALUE Suppose you place $100 in a CD that earns 2% interest compounded annually.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/02/2009 for the course FIN 350 taught by Professor Schonlau during the Spring '08 term at University of Washington.

Page1 / 20

Lecture2 - LECTURE 2 TIME VALUE OF MONEY: COMPOUND...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online