02_Time_Value_of_Money-Day_1

# There are many buyers and sellers there are no

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There are many buyers and sellers. There are no transaction costs. The "market interest rate" represents the collective preferences of traders. The yield curve is flat. Unless told otherwise, the same interest rate applies regardless of the time of the investment.

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Understanding TVM TVM tells us that: 1) If we invest money today, we will be repaid more money in the future. 2) If we expect to receive some payment in the future, we can trade it for a smaller payment today. Rule of thumb: "A dollar today is worth more than a dollar tomorrow." Or, conversely: A dollar today, can be traded for more than one dollar tomorrow. The important question is, " How much more?"
Simple Interest Interest rate and dollar amount of interest payments are constant over time. Ex: You invest money in a savings account, and it pays out the same amount every year. Interest accrues on the principal invested but not on past interest earned. Simple interest formula: FV = PV × (1 + r × t)

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Variable Definitions Present value (PV) = cash flow at beginning of investment period (not always today). Future value (FV) = cash flow at end of investment period (not always in the future). Interest rate (r) = percentage return per period. Number of periods (t) = total amount of time that money was invested.
Ex. 4: Simple Interest You invest \$100 in a savings account earning 10% in simple interest. How much money is in your account after 1 year? 2 years? 5 years? 10 years? FV 1 = PV×(1+r×t) = 100×(1+0.10×1) = \$110 FV 2 = PV×(1+r×t) = 100×(1+0.10×2) = \$120 FV 5 = PV×(1+r×t) = 100×(1+0.10×5) = \$150 FV 10 = PV×(1+r×t) = 100×(1+0.10×10) = \$200

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Compound Interest Interest rate is constant, but the dollar amount of interest increases over time.
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