ADM 3351 Lecture Notes - Lecture 2: Zero-Coupon Bond, Dirty Price, Premium Bond
13 Dec 2017
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Document Summary
Money has time value because of the opportunity to invest it at some interest rate. Example: you deposit with a bank for one year. The bank promises to pay you the principle amount back in one year plus interest. You may interpret that the annual interest rate is 8%, with which the future value of your deposit can be found by the compounding formula as. If you extend your deposit and the interest with the bank for another year, your future value will be. The bank may tell you that it is going to invest and reinvest your deposit semiannually, i. e. , twice a year. However, there is no reason why you should care how the bank is going to spend the. 1 money that you lend to the bank. All you care is that the bank will pay you the principle back plus interest at the end of the year.
