Time Value Summary - Time Value of Money Summary • Factors Affecting Discount Rates pure time premium risk inflation income tax • Time Lines a

Time Value of Money Summary The arithmetic of finance • What is a discount rate?  Equates value of cash flows at different times. Assumes pure substitutes.  Best alternative or opportunity cost • Future and Present Values:  single period  multi-period -- annuities • Multi-period Rate of Return  arithmetic  geometric  annual percentage rate (APR)  effective annual rate (EAR)  reinvestment rate assumption

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Unformatted text preview: Time Value of Money Summary • Factors Affecting Discount Rates pure time premium risk inflation income tax • Time Lines -- a useful organizing device that leads naturally into a spreadsheet. • Special Applications: residential mortgages (Ch. 12) bonds (Ch. 14) 1 ) 1 ( ) 1 (-+ + = i k k nom real tax before tax after k t k---= ) 1 (...
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