COMMERCE 3FD3 Chapter Notes - Chapter 14,19,20: Effective Interest Rate, Discount Window, Option Style
18 Nov 2016
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Dollar today is worth more than dollar in the future. Can invest it now and earn a return so have more than a dollar in the future. Process of calculating future value is called compounding. Discounting the inverse of compounding is the process of calculating present value. Roi depends on expected rate of return and how frequently it is compounded. Effective interest rate is higher the more frequently you compound. If paid interest twice a year then can reinvest sooner and earn return on amount invested. In reality do not know ahead of time what the rate will be when we reinvest. Sum of present value of series of cash flows. Rate of return at which npv is zero. Accept project if iir is greater than rate of return for risk of project. Series of cash flows that occur at regular intervals.
