Week 9-3

Week 9-3 - Economics/Management4 Spring2010 TheTimeValueofMoney singleamounts AndQuiz#7 Week 9-3 and 10-2 TheStartingPoint Adollarinhandtoday

Info iconThis preview shows pages 1–14. Sign up to view the full content.

View Full Document Right Arrow Icon
 The Time Value of Money “single amounts”   And Quiz #7 Friday May 28 and Wednesday June 2  Economics/Management 4 Spring 2010 Week 9-3 and 10-2
Background image of page 1

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

View Full DocumentRight Arrow Icon
Background image of page 2
The Starting Point A dollar  in-hand  toda is worth more than  a dollar tomorrow . We don’t exchange  $100 today for $100  tomorrow.  Present dollars are not Future dollars. Apples are not  Oranges.
Background image of page 3

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

View Full DocumentRight Arrow Icon
Time Matters “When” you receive( or pay) is important. We  discount   promises   Especially, promises to pay later and
Background image of page 4
Time Matters We  compound  money  we have today Because we can invest it . A dollar “now”  involves no risk of having it; you have it so  you can invest that dollar.
Background image of page 5

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

View Full DocumentRight Arrow Icon
Background ome people have more dollars today than  they need  - ther people need cash today . o those who have   lend  to those who don’t .
Background image of page 6
Financial Markets sell dollars Borrowers and most Companies  buy dollars. enders sell dollars for promises to be paid-back  principal –  the amount that was lent lus  interest  –  rent on the principal, which 
Background image of page 7

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

View Full DocumentRight Arrow Icon
The Problem   There is a  pricing problem . How much does the buyer of today’s dollars pay the  lender with  future  dollars? Obviously, the price for One  present  dollar is going to  be at least -  One future dollar plus something.
Background image of page 8
Two Scenarios 1. We can trade single sums of money across  discrete time periods for single sums in return.  1. We can trade single sums of money at one point  in time for multiple payments or deposits of  money periodically over several periods of time.
Background image of page 9

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

View Full DocumentRight Arrow Icon
The Formulation $ Future Dollar  = $ Present Dollar x (Something > 1) because the Present Dollar can be lent or invested $ Future Dollar  = $ Present Dollar x (1 + the rate of return) $ Future Dollar  = $ Present Dollar x  (1 + r)  for each period $ Future Dollar  = $ Present Dollar x  (1 + r)  
Background image of page 10
The Basic Relationship The earning power of a dollar in-hand today is based on the  Compounding process , written: [1] FV = PV x (1+r)   t   where there are  two $ values   and  two parameters :  1.   FV  = future value in $dollars  2.   PV  = present value, the value of $ dollars in-hand today  3.      r  =  an  annual  rate  of return or an interest rate  4.      t  =  number of  years  between today and the “future”
Background image of page 11

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

View Full DocumentRight Arrow Icon
For Example: invest $ 100 for 2  years @ 10 percent FV = PV x (1+r) t =  $100 x (1 + 10%)  2 = $100 x (1.10)  2 = $100 x 1.1 x 1.1 =  $110 x 1.1 $121 
Background image of page 12
years at 10 percent interest. What future  value can I expect?    
Background image of page 13

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

View Full DocumentRight Arrow Icon
Image of page 14
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/06/2010 for the course MGT 181 taught by Professor Jordan during the Spring '08 term at UCSD.

Page1 / 36

Week 9-3 - Economics/Management4 Spring2010 TheTimeValueofMoney singleamounts AndQuiz#7 Week 9-3 and 10-2 TheStartingPoint Adollarinhandtoday

This preview shows document pages 1 - 14. Sign up to view the full document.

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