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Chp. 9 - The Basic Tools of Finance

# Chp. 9 - The Basic Tools of Finance - Chp 9 The Basic Tools...

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• Present Value - the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money. PV = X / (1 + r) N PV equals present value N is the number of years r is the interest rate X is the future amount received • Future Value - the amount of money in the future that an amount of money today will yield, given prevailing interest rates. FV = X * (1 + r) N • The Rule of 70 states that if something grows at the rate of X% per year, it will take approximately 70 / X years to double in size. A dislike of certainty • A person who is risk averse dislikes losses more than he or she likes comparable gains. Ex. The pain of losing \$5,000 is greater than the pleasure of winning \$5,000. The Law of Diminishing Marginal Utility states that the consumption of the first unit of a good or service gives you more satisfaction than does the second or third unit. The higher the standard deviation of a portfolio's return the more volatile the return, and

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Chp. 9 - The Basic Tools of Finance - Chp 9 The Basic Tools...

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