FIN301 Chapter 5 all stu

FIN301 Chapter 5 all stu - Key Vocabulary Time Value of...

Info iconThis preview shows pages 1–16. Sign up to view the full content.

View Full Document Right Arrow Icon
FINA 760 Corporate Finance Farmer School Key Vocabulary 1 Time Value of Money (TVM) Time Lines Compound Interest Compounding Discounting Interest rates Nominal, quoted, stated rate Periodic rate Effective annual rate (EAR)
Background image of page 1

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

View Full DocumentRight Arrow Icon
FINA 760 Corporate Finance Farmer School Time Value of Money * 2 This is the foundational concept of Finance Theoretical Mathematical Calculator
Background image of page 2
FINA 760 Corporate Finance Farmer School “Money Makes Money” 3 Money today is worth more than the same amount of money in the future Reason - earn interest on the money “Smart” money vs. “Lazy” money
Background image of page 3

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

View Full DocumentRight Arrow Icon
FINA 760 Corporate Finance Farmer School 7 “Ancient Wonders of the World” 4
Background image of page 4
FINA 760 Corporate Finance Farmer School What is the “8th” Wonder of the World? 5 3 elements - 1. Absolute amount of return (interest rate – higher is better at a given amount of risk) 2. Number of times it is compounded (more is better) 3. Absolute amount of time (more is better)
Background image of page 5

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

View Full DocumentRight Arrow Icon
FINA 760 Corporate Finance Farmer School 6 Which offer would YOU take? n You graduate from high school and your mother makes you two offers: 1. She will put $20,000 in a savings account EVERY YEAR until you retire (47 years at 3% per year) 2. She will put $20,000 in a mutual fund in the first year only (47 years and earns 10%/yr above inflation)
Background image of page 6
FINA 760 Corporate Finance Farmer School 7 Compare Year $20,000/yr $20,000 once 10 20 30 47
Background image of page 7

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

View Full DocumentRight Arrow Icon
FINA 760 Corporate Finance Farmer School 8 A picture of my cat
Background image of page 8
FINA 760 Corporate Finance Farmer School Simple vs. Compound Interest 9 Simple Interest Interest on original principal only Compound Interest Interest paid on accumulated value Equals simple interest plus “interest on interest”
Background image of page 9

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

View Full DocumentRight Arrow Icon
FINA 760 Corporate Finance Farmer School “Types” of Interest 10 Simple Interest Earn interest only on the original balance $100 deposit at beginning of year earning 5% annually 5% of $100 for one year is $5 $100 x .05 = $5 End of year 1 = $105 End of year 2 = $110 End of year 3 = $115
Background image of page 10
FINA 760 Corporate Finance Farmer School “Interest on Interest” 11 Earns “interest” on previous “interest” $100 deposit earning %5 annually End of year 1 = $105 $100 x 5% = $5.00 End of year 2 = $110.25 $105 x 5% = $5.25 End of year 3 = $115.76 $110.25 x 5% = $5.51
Background image of page 11

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

View Full DocumentRight Arrow Icon
FINA 760 Corporate Finance Farmer School Compound Interest Compound interest = simple interest + interest on interest All we are interested in is compound interest
Background image of page 12
FINA 760 Corporate Finance Farmer School Time Lines are your friend 13 Time line - a graphic representation of cash flows
Background image of page 13

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

View Full DocumentRight Arrow Icon
FINA 760 Corporate Finance Farmer School Time Lines are your friend 14 Time line - a graphic representation of cash flows 0 1 2 3 4 5 6 7 (Periods) 1 = the “end” of period 1 and the “beginning” of period 2
Background image of page 14
Corporate Finance Farmer School Time Lines are your friend 15 Time line - a graphic representation of cash flows 0 1 2 3 4 5
Background image of page 15

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

View Full DocumentRight Arrow Icon
Image of page 16
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/18/2012 for the course FIN 301 taught by Professor Schaeff during the Spring '08 term at Miami University.

Page1 / 68

FIN301 Chapter 5 all stu - Key Vocabulary Time Value of...

This preview shows document pages 1 - 16. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online