COMM
Class 2 Jan 9th Before

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

• Notes
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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
‘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

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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
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

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Time Lines 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

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Simple Interest I Interest that is paid only on the amount originally invested but not on any interest that accrues subsequently.
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• Spring '10
• E.Fowler

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