COMMERCE 2FA3 Lecture 2: Time Value

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 2FA3
• Professor: Richard Deaves

Document Summary

Money in the present is worth more than the same amount in the future. It"s (cid:271)etter to re(cid:272)ei(cid:448)e today than later in the future. Start off with this assumption: suppose you have to choose between today or a year from now. If you put your money in a savings account earning 10% per year, will (cid:272)o(cid:374)(cid:448)ert to (cid:1009) i(cid:374) the future, so it"s (cid:271)etter to ha(cid:448)e 0 a (cid:455)ear fro(cid:373) (cid:374)o(cid:449) than have today. We would convert present value into future value: suppose you can borrow for an interest rate of 10%, the amount you can borrow, that would need to be paid back is in a year, is . 55. Prese(cid:374)t (cid:448)alue of 0 is (cid:1008). (cid:1009)(cid:1009), so it"s (cid:271)etter to (cid:271)e pro(cid:373)ised 0 a (cid:455)ear from now than be given today. We would convert future value into present value.