FIN 300 Chapter Notes - Chapter 5: Discount Window, Cash Flow, Interest
FIN โ Chapter 5 โ Introduction to Valuation: the time value of money
Future value (FV) โ the amount an investment is worth after one or more periods
Future value = $1 x (1 + r)t
r percent for t periods
Compounding โ the process of accumulating interest on an investment over time to earn more
interest
Interest on interest โ interest earned on the reinvestment of previous interest payments
Compound interest โ interest earned on both the initial principal and the interest reinvested
from prior periods
Simple interest โ interest earned only on the original principal amount invested
Present value (PV) โ the current value of future cash flows discounted at the appropriate
discount rate
PV = $1/(1+r)t
Discount rate โ the rate used to calculate the present value of future cash flows
Discounted cash flow (DCF) variation โ calculating the present value of a future cash flow to
determine its value today
Inverse relationship between time, discount rates and present values
PV = FVt / (1 + r)t
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Document Summary
Fin chapter 5 introduction to valuation: the time value of money. Future value (fv) the amount an investment is worth after one or more periods. Future value = x (1 + r)t r percent for t periods. Compounding the process of accumulating interest on an investment over time to earn more interest. Interest on interest interest earned on the reinvestment of previous interest payments. Compound interest interest earned on both the initial principal and the interest reinvested from prior periods. Simple interest interest earned only on the original principal amount invested. Present value (pv) the current value of future cash flows discounted at the appropriate discount rate. Discount rate the rate used to calculate the present value of future cash flows. Discounted cash flow (dcf) variation calculating the present value of a future cash flow to determine its value today. Inverse relationship between time, discount rates and present values.