IEMS 326 Notes01TimeValue

# IEMS 326 Notes01TimeValue - Time Value of Money IEMS 326...

This preview shows pages 1–7. Sign up to view the full content.

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

View Full Document

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

View Full Document

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.

Unformatted text preview: Time Value of Money IEMS 326 Lecture 1 Goal • Value streams of future cashflows. • Project valuation: are we better off with or without this cashflow stream? • Bonds: how much would we pay for this cashflow stream? Simple Interest • Borrowing i.e. renting money: a 4% annual interest rate means that it costs \$4 = (0.04)(100) to rent \$100 for 1 year, with the rent paid at the end . • With the same simple annual rate, it costs \$2 to rent \$100 for 6 months (repay \$102) or \$8 to rent \$100 for 2 years (repay \$108). Simple interest is rare. Paying Interest Like Rent • If you paid the rent every period, the total amount paid would be the same as with simple interest. • Pay \$4 at year 1, \$4 at year 2 because the principal (amount owed) is still \$100. • Total payment: \$8. • Compare to simple interest: \$8 at year 2. Compound Interest • When the rent is not paid, but accumulates. • Recall: at 4% simple annual interest, a loan of \$100 for 2 years must be repaid with \$8 interest: \$4 for each year, at the end. • With annual compounding, – \$104 is owed after 1 year – \$108.16 = (\$104)(1.04) after 2 years. • Same rate, different meaning, different value. Simple vs. Compound • Simple interest at 4%: repay \$108 at year 2. • Compounding at 4%: \$108.16 at year 2....
View Full Document

## This note was uploaded on 04/07/2008 for the course IEMS 326 taught by Professor Staum during the Winter '07 term at Northwestern.

### Page1 / 19

IEMS 326 Notes01TimeValue - Time Value of Money IEMS 326...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online