7 why i a bird in the hand is worth two in the bush i

Info icon This preview shows pages 7–15. Sign up to view the full content.

View Full Document Right Arrow Icon
7
Image of page 7

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

View Full Document Right Arrow Icon
Why? I A bird in the hand is worth two in the bush I There are three main reasons why a dollar today is worth more than the expectation of one dollar in the future 8
Image of page 8
‘Interest’ and ‘Interest Rates’ I Interest I is the price someone who borrows money (borrower, debtor) pays the lender (creditor) for the use of the borrowed money. I Usually expressed as an annual percentage of the outstanding balance (‘principal outstanding’): => Interest rate r I Interest rate charged depends on: We distinguish between simple and compound interest. 9
Image of page 9

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

View Full Document Right Arrow Icon
Visual Aid: The Timeline I A timeline is a linear representation of the timing of potential cash flows. I Drawing a timeline of the cash flows lets you visualize a financial problem that involves cash outflows and inflows at different points in time. 10
Image of page 10
Visual Aid: The Timeline I A timeline is a linear representation of the timing of potential cash flows. I Drawing a timeline of the cash flows lets you visualize a financial problem that involves cash outflows and inflows at different points in time. 11
Image of page 11

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

View Full Document Right Arrow Icon
Time Lines 12
Image of page 12
Cash Flows and The Timeline I One can differentiate between two types of cash flows: Inflows are positive cash flows. Outflows are negative cash flows, which are indicated with a ‘–’ (minus) sign. Example: You borrow $10,000 from a friend. You repay him in two installments of $5,500 at the end of each of the next two years. Your cash flows look like this: 13
Image of page 13

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

View Full Document Right Arrow Icon
Simple Interest I Interest that is paid only on the amount originally invested but not on any interest that accrues subsequently.
Image of page 14
Image of page 15
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