Lecture 8.2

Lecture 8.2 - The Time Value of Money 1 Notations to be...

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Lily Qiu, Assistant Professor Economics Department, Brown University EC1710, Lecture 8.2, Spring 2010, page 1 The Time Value of Money 1. Notations to be used: For time periods: 0, today; 1, next period (e.g. day, month, year, etc.); t, some time period in the future; T, the last/final time period. C: cash amount, called cash flow C t : cash flow at time t D t-1,t , or D t : a flow of D (e.g., dividends) over time period t-1 to t r: rate of return 2. The rate of return r = r 0, 1 = 0 0 1 C C C = 1 0 1 C C r is the rate of return from investing C 0 today and getting C 1 at time 1. With dividends or coupons (D) paid at the end of the period: r = r 0, 1 = 0 0 1 1 C C D C = 1 0 1 1 C D C The dividend (or coupon) yield is: The capital gain is: The net return is: The percentage price change is: Q1: If the rate of return is positive, can the percent price change be negative? Q2: Suppose you invested $5 for a promise of $8 in 10 years. What is the holding-period rate of return? Note: when we talk about a rate of return, we need to know the corresponding time period.
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This note was uploaded on 07/21/2010 for the course ECON 1710 taught by Professor Qiu during the Spring '10 term at Brown.

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Lecture 8.2 - The Time Value of Money 1 Notations to be...

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