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QABE Lecture 2
Time Value of Money
School of Economics, UNSW
2011
Contents
1 Introduction
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2 Types of Interest
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Option 3: Continuously Compounded Interest .
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4 Summ
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3 Present Value
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1
Introduction
This week we begin a section of the course looking at the
time value of money
.P
u
t
simply, the maths that we need when dealing with
money
. The reason we need to
develop an understanding of money mathematics (as opposed to, say, just ‘numbers
mathematics’) is that numbers representing money, have the special property that they
are actually representing
value
. The trouble is, as opposed to (say) the number ‘3’ which
represents the same information yesterday, today, and tomorrow, if we were talking about
‘3 dollars’ of some currency, we would have to be very careful about
when
the number
was quoted – that is, the
value
of the representation (‘3 dollars’) is deFned in part by
the
time
that it is quoted. Three dollars today wouldn’t get you even a couple of cans
of Coke, three dollars twenty years ago would have obtained you
three
cans of coke.
An obvious question is, why does money have this peculiar ‘timevalue’ property?
±or now, it is enough to raise it as a question. We start our inquiry into the realm of
timevalueofmoney by looking at the di²erent ways that
interest
can be calculated.
That is, the value of a
deposit
(some sum of money) can grow over time in the bank’s
hands. Part of this is to do with simple timevalue considerations, and part of it has to
do with various
investments
the bank has made. More on this later!
1
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View Full DocumentECON 1202/ECON 2291: QABE
c
±
School o
fEconomics, UNSW
Agenda
1. Simple interest
2. Compound interest
3. Continuous compounding
4. Present value
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The Problem
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 Three '08
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