25300 Lecture Notes - Lecture 2: Discounted Cash Flow, Interest
Document Summary
Time value of money 1: tvm concept. Converting cash flows at different times into a single number to assist in. A dollar today is worth more than $ tomorrow: simple vs. compound interest. Simple: interest = prn (used for bills or <12 month terms: future value of a single amount. Accumulated value or terminal value = future value. Simple interest: fv = pv(1 + r x n) Compound: fv = pv(1 + r)^n: present value of a single amount. Compound: pv = fv(1 + r)^-n: effective rates vs. nominal rates. Nominal: more than once per year (rate observed in the market) To convert a nominal rate to an effective rate. * m = no. of compounding periods per year: time lines to represent the dcf process. As pv goes up, discount rate does down (inverse relationship) Time value of money 2: annuities & perpetuities. Annuity: a number of equal cash flows occurring at equal time intervals.
