This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: ‘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 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 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 Simple Interest I Interest that is paid only on the amount originally invested but not on any interest that accrues subsequently. I Interest payments are given by I =r*P each period, where r is the simple rate of interest I Over n periods, the original amount invested grows to I Example: – Firm borrows $100 at 5% simple interest due at the end of 4 years....
View
Full Document
 Winter '10
 E.Fowler
 Time Value Of Money, Interest

Click to edit the document details