{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture02_winter09

Lecture02_winter09 - Time Value of Money Time Value of...

This preview shows pages 1–12. Sign up to view the full content.

Time Value of Money

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Time Value of Money Is Money received Today worth more or less than the same received in the Future? Usually MORE Why?
Time Value of Money We could invest the money received today in a riskless asset and have more in the future. Example: The 6-month Treasury Bill has a return of 1.56%. If \$1,000 are invested in it, after 6 months you end up with \$1,015.6.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Time Value of Money The conclusion is that \$1,000 today are more valuable than \$1,000 six months from now.
Time Value of Money George Washington received a salary of \$25,000 in 1789 George Bush receives a salary of \$400,000 to go with a \$50,000 expense account. Who was better paid?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Time Value of Money If we use the CPI Index, \$25,000 in 1789 is the same as \$550,000 today. If we use the GDP per-capita measure, \$25,000 in 1789 is the same as \$23,000,000 today.
Future Value and Compounding If you invest C 0 today, earn a interest rate of r, how much do you have after one year? C 1 = C 0 x(1+r) C 1 is the FUTURE VALUE in one year of C 0 today

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Future Value and Compounding If you invest C 0 today, earn a interest rate of r, how much do you have after two years? After one year C 1 = C 0 x(1+r) In the second year C 2 = C 1 x(1+r)=C 0 x(1+r)x(1+r)=C 0 x(1+r) 2 C 2 is the FUTURE VALUE in two years of C 0 today
What is Compounding? It Means that the interest you receive during the time of your investment is RE-INVESTED and will itself earn interest in the next periods You are earning interest over past interest!

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
General Rule If you invest C 0 today, earn a interest rate of r, how much do you have after n years? C n = C 0 x(1+r) n C n is the FUTURE VALUE in n years of C 0 today
Is Compounding Important?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern