"Lecture - More Time Value and Marginal Analysis

"Lecture - More Time Value and Marginal Analysis -...

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Present Value of Indefinitely Lived Assets Suppose an asset generates a cash flow of CF at the end of each year in perpetuity . An example would be British Console Bond. The present value of this cash flow will be: i CF i CF i CF PV t t t t = + = + = = = 1 1 ) 1 ( 1 ) 1 (
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Compounding at other than annual rates: Suppose i is the quoted Annual Percentage Rate (APR) , but interest is compounded at something other than an annual rate. If interest is compounded m times a year, the Future Value (FV n ) of a current Present Value (PV) n years into the future will be: m n m n m i PV FV × × + = 1 Divide the annual interest rate by the number of times interest is compounded during the year. This gives you the correct period rate of interest. Also, multiply the number of years by the number of compounding periods to get the correct number of periods into the future.
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Continuous Compounding: Here interest is compounded at every instant in time. The number of compounding periods per year, m, goes to
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This note was uploaded on 04/12/2011 for the course ECON 415 taught by Professor Holland during the Spring '09 term at Purdue University-West Lafayette.

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"Lecture - More Time Value and Marginal Analysis -...

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