Fin300.Lecture2.TVMnotes

# Fin300.Lecture2.TVMn - Lecture 2:The Time Value of Money This lecture note covers Simple Interest vs Compound Interest Fundamental tools for

This preview shows pages 1–8. Sign up to view the full content.

Lecture 2:The Time Value of Money

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

View Full Document
This lecture note covers: :: Simple Interest vs. Compound Interest :: :: Fundamental tools for financial analysis :: § Present Value and Future Value/ Discounting § Compounding Intervals § Continuous Compounding :: Useful Shortcuts :: § Annuities and Perpetuities § Growing annuities and perpetuities
C n : Future value at end of n periods of C 0 dollars today C 1 = C 0 + rC 0 (deposit C 0 for 1 period) C 1 = C 0 (1 + r) C 2 = C 1 + rC 1 (deposit C 1 for 1 period) C 2 = C 1 (1 + r) = C 0 (1 + r) 2 Recursively C n = C 0 (1 + r) n Compound Interest Formula

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

View Full Document
Example: \$1000 at 5% for 5 years Year Beginning Amount Interest on Original Principle Interest on Interest Ending Amount 1 1000.00 50.00 0.00 1050.00 2 1050.00 50.00 2.50 1102.50 3 1102.50 50.00 5.13 1157.63 4 1157.63 50.00 7.88 1215.51 5 1215.51 50.00 10.78 1276.28 C 5 = 1000(1.05) 5 = 1000 × 1.2763
Simple vs. Compound Interest

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

View Full Document
Present Values/Discounting C n = C 0 (1 + r) n FV n = PV 0 (1 + r) n PV 0 = FV n /(1 + r) n Present values are ADDITIVE PV(C 1 ,C 2 ,...,C n ) = PV 1 (C 1 ) + PV 2 (C 2 ) + . .. + PV n (C n ) = t = 1 n PV t (C t )
Example : "Claim X" : \$100 a year at the end of each year for 10 years.

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 02/28/2011 for the course FIN 300 taught by Professor Olander during the Spring '08 term at ASU.

### Page1 / 22

Fin300.Lecture2.TVMn - Lecture 2:The Time Value of Money This lecture note covers Simple Interest vs Compound Interest Fundamental tools for

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online