Mathematics1 - 6 Compound Interest 7 Present Value Example:...

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1 The Mathematics of Finance Readings: Text Chapter 9. OVERVIEW Present Value and Future Value of a Single Cash Flow. Present Value and Future Value of Multiple Cash Flows. Conventions for Reporting Interest Rates. Using Your Financial Calculator.
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2 Why “Mathematics” Matters Characteristics of financial securities: Invest today in exchange for future cash flow promises. Control rights in case cash flows fail to materialize. Examples: Corporations issuing stocks. Corporations and Government issuing bonds. Individuals receiving bank/finance company loan Individuals make deposits in saving accounts What are these “promises” worth? Payments occur in the future. Payments may be risky.
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3 Cash Flow Time Line Time 0 1 2 3 N r
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4 Bank of America’s one-year jumbo CD promises a return of 3.60% annually. I deposit $100,000 for one year. Interest is paid annually.
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5 Bank of America’s 5 year CD promises 3.69% annually. Interest is paid annually.
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Unformatted text preview: 6 Compound Interest 7 Present Value Example: You need to set aside enough to make a tuition payment of $7,000 one year from now. How much must you set aside if the money is placed in a savings account at 3% per year? 8 Present Value (II) Assume that your parents are making the same calculation for your siblings (who is just starting high school) first tuition payment. 9 Financial Calculators Example: Calculate the PV of $100,000 to be paid 10 years from now if the interest rate is 5.47% per year. 10 10 Example: Calculate the FV of $10,000 invested at 6.33% per year for 10 years. Financial Calculators 11 11 Solving For k Or n Example: Assume you have $1,200 to invest and want to know how long it will take for that sum to grow to $3,000 if invested in a CD at 7%: 12 12 Solving For k Or n Example: Assume you have $1,200 to invest and want to know how long it will take for that sum to grow to $3,000 if invested in a CD at 7%:...
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Mathematics1 - 6 Compound Interest 7 Present Value Example:...

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