BU283 Lecture Notes - Lecture 2: Cash Flow, Effective Interest Rate, Interest
Document Summary
Simple interest versus compound interest: interest = principal*interest rate, fv = pv+(pv*i, simple interest is only one period, compound interest is multi period future value. The timeline: the timeline is a graphic representation of cashflows, inflows is cash you receive and has a positive sign, outflows is cash you spend and has a negative sign. Future value of a sum: compound interest future value over multiple periods, fv = p*(1+i)^n, calculating interest earned: Interest earned = fv-pv: compounding rules of thumb, future balance increases if periods and interest rates increase, compound interest theory applies to any growth, any length of period can be used, compounding or conversion period. Future value of mixed streams of cash flows: compute future value of each cash flow separately and add them together. Solving for interest rate: i = (fv/pv)^(1/n)-1. Solving for the number of periods: fv/pv = (1+i)^n.
