BU283 Lecture Notes - Lecture 2: Memory Stick, Interest, Opportunity Cost
Document Summary
Time value of money: the timeline. Has a negative sign (-: simple interest and one-period future value. Quoted rate, nominal rate or apr (i) Assume interest rate is annual unless otherwise stated. Definition: the process of leaving your money and any accumulated interest in an investment for more than one period (reinvesting the interest) is known as compounding. Invest for 2 years at 10% per annum. Where n=number of time periods: present value with compounding. Since there are alternative investment opportunities that generate a return (i. e. , the bank account) the prices of all assets are determined by discounting the investment"s cash flows. Discount at a rate which reflects the opportunity cost of investing the funds. The rate you could earn on an equivalent investment. Same time frame and same risk: compound average (geometric average) rate: solve for i. Solve for i in the context of a future (present) value problem.
