FIN 300 Lecture Notes - Lecture 5: Liquid Oxygen, Discount Window, Compound Interest

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One of the basic problems that financial managers face is how to determine the value today of cash flows that are expected in the future. Future value (fv): the amount an investment is worth after one or more periods. The amount of money to which an investment would grow over some length of time at some given interest rate. Compounding: the process of accumulating interest in an investment over time to earn more interest. Interest on interest: interest earned on the reinvestment of previous interest payments. Compound interest: interest earned on both the initial principal and the interest reinvested from prior periods. Simple interest: interest earned only on the original principal amount invested (1 + r)^t is sometimes called the future value interest factor. Present value: the current value of future cash flows discounted at the appropriate discount rate. Discount: to calculate the percent value of some future amount.

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