Lecture 1 Flashcards
Future value =
Amount to which investment will grow after earning interest
Simple interest =
Interest earned only on original investment
Compound interest =
Interest earned on interest.
Simple interest formala =
F = P(1 + i n)
Compound interest formula =
F = P(1 + i)^n
Interest rate is considered..
The risk
The greater the risk
Greater the reward
Multiple cash flow calculations
Add together individual calculations
Present value =
Value today of a future cash flow
Why is the present value needed?
So that managers can make decisions today
Annuities =
Equally spaced level stream of cash flows for a limited period of time
Perpetuities =
A stream of level cash payments that never end
Perpetuity formula =
P = C/ i
Discounting periods are used when
The interest is charged more frequently than once per year eg quarterly/ monthly
When the compounding period approaches infinity, future value =
F = Pe^in (e = exponential function)
