There are many buyers and sellers there are no

Info icon This preview shows pages 7–13. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Image of page 7

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

View Full Document Right Arrow Icon
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?"
Image of page 8
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)
Image of page 9

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

View Full Document Right Arrow Icon
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.
Image of page 10
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
Image of page 11

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

View Full Document Right Arrow Icon
Compound Interest Interest rate is constant, but the dollar amount of interest increases over time.
Image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern