FIN 502 Chapter 2: Chapter 2.docx
Document Summary
Rate of return: used to compare different investments and loans: different ways in which one can calculate it which often leads to misleading ads. Holding period returns and multiple period rates of return. Discount bond: an investment that pays no interest during its lifetime; therefore, the interest you receive on it is part of the final payment. Discount rate: interest rate or rate of return that we use to equate amounts of money paid or received in different periods. Opportunity cost: is what you earn if you don"t spend the money today. The discount rate simply tells you in monetary value the amount that you are giving up- the opportunity forgone- in order to consume now (the rate that makes us indifferent between present and future amounts) Ex: if you spend . 09 on clothes today, you have the clothes and can start wearing them now.