03TimeValueOfMoney2 - 08/09/2010 Centre for Management of...

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08/09/2010 1 Centre for Management of Technology and Entrepreneurship University of Toronto Copyright: Joseph C. Paradi, 1996-2007 Yuri Lawryshyn, 2008-2010 Course: CHE374 Centre for Management of Technology and Entrepreneurship Time Value of Money Part B 2 “Time is Money” “Time Value of Money” Interest rate–cost / compensation Risk versus Reward What is risk? How do we quantify risk? How do we relate risk to reward? What is the safest investment? 3 Interest Period Interest rates are typically stated for some period, almost always for a year, but the computation of interest may be based on shorter compounding sub periods like months. The base unit of time over which an interest rate is calculated. 6% per year (if not stated otherwise it is compounded ANNUALLY ) 6% per year, compounded semi annually 6% per year, compounded monthly 6% per year, compounded daily The longer the interest period, the higher the interest rate must be to provide the same return (inflation).
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08/09/2010 2 4 Example Credit Cards For a $1000 balance at the beginning of the year, find the effective annual interest rate and total owed at the end of the year with 18%/year, compounded monthly. Assume you make no payments throughout the year. Why do credit card companies charge such high interest rates? 5
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This note was uploaded on 04/20/2011 for the course CHE 374 taught by Professor Lawrnshyn during the Fall '11 term at University of Toronto- Toronto.

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03TimeValueOfMoney2 - 08/09/2010 Centre for Management of...

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