Chapter 5 FIN

# Chapter 5 FIN - Chapter 5 Compound/Future Value Compound...

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Chapter 5 Compound/Future Value Compound Interest: the situation in which interest paid on an investment during the first period is added to the principal. During the second period, interest is earned on the original principal plus the interest earned during the first period. - Present value x (1+interest rate) - Why do we earn more interest during the second year than we did during the first? It is because we now earn interest on the sum of the original principal and the interest we earned in the first year. In effect, we are now earning interest on interest. Value at the end of year 2 = value at the end of the year 1 x (1 + R) Future value: the amount to which your investment will grow Future value = present value x (1+r)n - R = rate, n = years Future value factor: the value of (1+r)2 used as a multiple to calculate an amount’s future value - Future value = presnt value x (future value factor) Simple Interest: if you only earned interest on your initial investment it would be referred to as a simple interest There are three different approaches that you can use to solve a time value of money problem: 1. Just do the math 2. Financial calculators 3. Spreadsheets Use of Financial Calculator - N = stores or calculates the total number of payments or

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## This note was uploaded on 08/30/2011 for the course FIN 3310 taught by Professor Potts during the Fall '08 term at Baylor.

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Chapter 5 FIN - Chapter 5 Compound/Future Value Compound...

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