5/5/10 1:37 AM Blackboard Learn Page 1 of 1 https://blackboard.usc.edu/webapps/portal/frameset.jsp?tab_tab_gro…oard%2Fexecute%2Flauncher%3Ftype%3DCourse%26id%3D_37604_1%26url%3D 19.a Interest Formulas 1. Single-period: The future value FV of $A invested for 1 year at an interest rate R is A(1+R). The present value PV of $B paid in 1 year, at an interest rate of R is B/(1+R). FV=A(1+R) PV=B/(1+R) Example 1: $10 placed in the bank for 1 year at 5% interest will grow to $10(1.05)=$10.50 after 1 year. Example 2: A bond that promises to pay $108 in one year, when the market rate of interest is 8%, will be worth $108/(1.08)=$100 today. Note that as the interest rate R rises, the price of the bond will fall. For example, if the market interest rate were 9%, the same bond would be worth $108/1.09=$99.08. 2. Multiple periods: The future value FV of $A invested for n years at an interest rate R is A(1+r) n . The present value PV of $B paid in n years, at an interest rate of R, is B/(1+R) n . FV= A(1+r)
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This note was uploaded on 05/05/2010 for the course ECON 303 taught by Professor Cheng during the Spring '07 term at USC.