11+Finance+II++TVM

# 11+Finance+II++TVM - TimeValueofMoney ProfessorRoberts...

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Time Value of Money Professor Roberts

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Agenda Interest Calculations Simple Interest Compound Interest Time Value of Money Future Value Present Value Interest rate versus Discount rate Rational Investor Risk/Reward  Calculator Workshop
Simple Interest Interest is earned only on the original investment/principal  amount. Linear Growth  in Inve s tm e nt Exa m ple : \$100, 3-ye a r inve s tm e nt a t 15%  s im ple  inte re s t Year 1 - \$100 *  .15 = \$15 interest  Total = \$115 Year 2 - \$100 * .15 = \$15 interest  Total = \$130 Year 3 - \$100 * .15 = \$15 interest  Total = \$145 Total Interest =  \$45

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C o m po und Inte re s t Inte re s t Ra te  is  e a rne d o n the  o rig ina l  princ ipa l  plus  a ny a c c um ula te d inte re s t “Inte re s t o n Inte re s t” Exponential Growth Mo s t c o m m o nly us e d
C o m po und Inte re s t Exa m ple : \$100, 3-ye a r inve s tm e nt a t 15%   inte re s t, c o m po unde d a nnua lly Ye a r 1: \$100.00 *.15 = \$15.00 inte re s t  To ta l = \$115.00 Ye a r 2: \$115.00 *.15 = \$17.25 inte re s t   To ta l = \$132.25 Ye a r 3: \$132.25 *.15 = \$19.84 inte re s t  To ta l = \$152.09 To ta l Inte re s t =  \$52.09

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Compound vs. Simple Interest Compound Simple Check this out!
Time Value of Money (TVM)

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\$\$ Today or \$\$ “Tomorrow”? Four questions: How much \$\$ today? How much \$\$ “tomorrow”? How long until “tomorrow”? What equivalent use could I have put the \$\$ to if I  had it today?
What will be the value at a point in the future of an investment made  today, if I invest a specific amount, at a specific interest rate, for a  specific period of time? Function of:

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## This note was uploaded on 01/09/2011 for the course SMG 121 taught by Professor Arnold during the Spring '08 term at BU.

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11+Finance+II++TVM - TimeValueofMoney ProfessorRoberts...

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