MAF101 Lecture Notes - Lecture 2: Opportunity Cost, Nominal Interest Rate, Interest
Document Summary
The time value of money = a dollar received today is worth more than a dollar received in the future. Why: because we are foregoing the possibility of investing or consuming, there is a risk that (cid:455)ou (cid:449)o(cid:374)(cid:859)t get (cid:455)our (cid:373)o(cid:374)e(cid:455) i(cid:374) the future. We need to be compensated for giving up consumption today for consumption in the future. Financial managers compare the marginal benefits and marginal costs of investment projects. These projects often have a long-term horizon: the timing of benefits and cost matters. I(cid:374)terest or i(cid:374)terest rate is the (cid:858)(cid:272)ost pri(cid:272)e of (cid:373)o(cid:374)e(cid:455)(cid:859) a(cid:374)d is usuall(cid:455) e(cid:454)pressed as a per(cid:272)e(cid:374)tage, as (cid:449)ell as per annum (p. a). 5% pa means interest per year on every principle. Required rate of return (has to take account of risk also) Present value: (pv) the current value of future cash flows. In practice, it is known as principle (of borrowing or lending)
