COMMERCE 2FA3 Lecture Notes - Lecture 2: Mortgage Loan, Net Present Value, Compound Interest

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

Document Summary

Pvif (present value interest factor) =1/(1+k)t, the present value of received at t and discounted at k% per period (year). Fvif (future value interest factor) =(1+k)t, the future value of can be compounded into given k and t. Discount rate (cid:894)k(cid:895): the i(cid:374)terest rate was used to (cid:862)dis(cid:272)ou(cid:374)t(cid:863) (cid:271)a(cid:272)k a future cashflow. Interest rate ad discount rate could be the same but not always. The discount rate used for the cashflows of a (risky) stock is often termed the. Stated interest rate: the one that is quoted. Effective interest rate: have to transfer from stated interest rate due to compounding. 6% is the stated rate based on monthly compounding, 6%/12=0. 5% is the effective rate over one month. Gross interest rate: one plus the interest rate. Compounding means money grows because every year you get interest and the interest can be reinvested to generate more interest. Present value additivity & future value additivity.