COMM 308 Chapter Notes - Chapter 5: Opportunity Cost, Effective Interest Rate, Investment
15 Oct 2016
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Time value of money - idea that dollar today is worth more than dollar in future. Medium of exchange - something that can be used to facilitate transactions. Opportunity costs, such as investing dollar to earn return, are what produce time value of money. Opp. cost of money is int. rate ( price of money ) that would be earned by investing it. Required rate of return (discount rate) - market interest rate (k) or investor"s opportunity cost (what investor can do with money invested) Simple interest - paid or received on only initial investment (principal) Interest not earned on accrued (or earned) interest. Value of investment at any point in time value (time n) = p + ( n x p x k ) interest = p x k. P = principal n = number of periods k = interest per period. Compound interest - earned on principal amount invested and on future int. payments.
