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Unformatted text preview: 1 1 Financial Economics Concepts Time Value of Money Compounding Discounting Risk/return/diversification Stock Price, Efficient markets and random walks Insurance basics Behavioral Issues Punch lines rather than depth 2 In the News? 3 Course Issues Extra credit Investment Game Advise 3 Tutoring/ LRC/ Helping Yourself FINAL EXAM Wikis Clicker Points 2 4 Compound growth and rule of 72/70/69 Compound Growth ex: $100x(1+.1) =110 $100x(1+.1)(1+.1)=121 $100x(1+.1) 2 =121 -> FV = PV (1+i) n = PVei n Where did extra $1 come from The most powerful force in the universe is compound interest . Albert Einstein What About inflation? inom=ireal+exp infl 2PV=PV(1+i) n -> 2= (1+i) n -> ln2=nln(1+i)-> 69/n=I (ln(1+i) approx i, mult by 100 5 Why/how do we discount future values? Present Discounted Value Why? (i=r=interest rate) Interest - not inflation, but linked I nominal = ireal + expected inflation Dis-count some of future stream Amt could earn in interest...
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- Summer '08