chapter4a - Chapter 4 Time value of Money Future Values...

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

View Full Document Right Arrow Icon
Chapter 4 Time value of Money
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 Future Values Future value: the amount of money an investment will grow to over some period of time at a given interest rate Suppose you invest $1,000 for one year at 10% per year. What is the future value in one year? o Interest = $1,000(.10) = $100 o Value in one year = principal + interest = $1,000 + 100 = $1,100 o Future Value (FV) = $1,000(1 + .10) = $1,100 Suppose you leave the money in for another year. How much will you have two years from now? o FV = $1,000(1.10)(1.10) = $1,000(1.10) 2 = $1,210
Background image of page 2
Future Value and Compounding The general formula for the future value of an investment over many periods can be written as FV = C 0 ×(1 + r) T Where C 0 is cash flow at date 0 r is the period interest rate T is the number of periods over which the cash is invested. Simple interest vs. compound interest Simple interest: interest is earned only on the original principal Compound interest: interest is earned on principal and on interest received
Background image of page 3

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

View Full DocumentRight Arrow Icon
You invest $100 for two years at 10% per year Future value with simple interest = $100 + $10 + $10 = $120 Future value with compound interest = $121 The extra $1 comes from the interest on interest ($10 earned in the first period) Note: When cash is invested at compound interest, each interest payment is reinvested. With simple interest, the interest is not reinvested. What would your $100 be worth after five years?
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 06/20/2010 for the course CB EF4441 taught by Professor Professorng during the Spring '10 term at 東京国際大学.

Page1 / 18

chapter4a - Chapter 4 Time value of Money Future Values...

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