BU283 Lecture Notes - Lecture 2: Opportunity Cost, Interest
Document Summary
Accumulating interest in an investment for more than one period (reinvesting the interest) is known as compounding. N is the number of compounding periods, not necessarily annual. In canada, can"t compound a mortgage more than twice a year. Because n is negative, you are discounting the future value. The prices of all assets are determined by discounting the investments cash flows. Discount at the rate which reflects the opportunity cost of investing (the rate you would earn on an equivalent investment with same time frame and same risk level) Up until this point we"ve assumed the compounding period is annual. M is the number of compounding periods in the year. Match the interest rate to the length of the compounding period, this is called the periodic rate (i/m) Adjust the number of periods, your exponent should be n*m. The more times you compound, growth begins to slow.
