FINE 2000 Chapter Notes - Chapter 4: Effective Interest Rate, Annual Percentage Rate, Real Interest Rate

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24 May 2012
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Future value (fv): amount to which an investment will grow after earning interest. Simple interest: interest earned only on the original investment; no interest is earned on interest. Future value interest factor: future value of a current cash flow of . Present value (pv): value today if a future cash flow (a dollar today is worth more than a dollar tomorrow) Discount rate: interest rate used to compute present values of future cash flows. **note: time it takes an investment to double in value equals approximately 72/r, where r is expressed as a percentage. (ex. doubling period is 8 years= 72/8= 9 percent) To find the future value of a stream of cash flows, calculate the future value of each flow and then add them. Present value of a stream of cash flows is the amount you would have to invest today to generate that stream. Annuity: equally spaced and level stream of cash flows.