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Chapter 005

# Chapter 005 - C Investing for more than one period 1 Going...

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Chapter 5 Introduction to Valuation: The Time Value of Money I. Future Value and Compounding A. Future Value (FV) refers to the amount of money an investment will grow to over some period of time at some given interest rate . B. Investing for a single period - If you invest \$100 in a saving account with 10% interest rate per year, you will have \$110 a year later. The \$110 is the future value of \$100 invested for one year at 10%. That means \$100 today is worth \$110 in one year, given the 10% annual interest rate.
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Unformatted text preview: C. Investing for more than one period 1. Going back to the \$100 investment, if you leave the entire \$110 in the bank, you will earn \$110 × 10% = \$11 in interest during the second year, so you will have a total of \$110 + \$ 11 = \$121. 2. Four Parts of \$121-The original principal \$100-First year’s interest \$10-Second year’s interest \$10-Compound interesting \$1 3. Future Value = Principal × ( 1 + r) t II. Present Value and Discounting III. More about Present and Future Value...
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