RSM230H1 Chapter Notes - Chapter 5: Money Lo, Compound Interest, Accrued Interest
Document Summary
Lo 5. 1 explain the importance of the time value of money and how it is related to an investor"s opportunity costs. Time value of money: idea that a dollar today is worth more than a dollar in the future. Required rate of return (discount rate): the market interest rate (k) or the investor"s opportunity cost. Lo 5. 2 define simple interest and explain how it works. Simple interest: interest paid or received on only the initial investment (principal) P = principal n = number of periods. Lo 5. 3 define compound interest and explain how it works. Compound interest: interest that is earned on the principal amount invested and on any accrued interest: the amount of compound interest earned increases every year. Fvn = future value at time n (1 + k)n = future value interest factor (fvif) Compound return represents the average annual growth rate in the value of invested at the start of the period.
