ECO349H5 Lecture Notes - Lecture 4: Cash Flow
Document Summary
Lecture #4 - the meaning of interest rates. Present value - with positive interest is a dollar paid to you one year from now is less valuable than a dollar paid today. We use interest rates as a way of thinking about prices of promised future cash flow in present where promised value is not random. The n period interest rate on our loan to the gocit(n) is defined by. So today date t can purchase (1+it(n))n dollars n years from today. If repay in one year: x (1+0. 1) = . If repay in two years: x (1+0. 1)2 = . Pv = summation of cf every year of bt(n)xcft+n. Suppose you win lotto 649 and the ontario gov"t gives you a choice: take . 5million today or million a year for the next 8 years, beginning next year. Simple loan - one payment at maturity date. Fixed payment loan - multiple fixed payments are specified dates.
