Management and Organizational Studies 2310A/B Chapter Notes - Chapter 5: Discount Window, Interest, Compound Interest

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 2310A/B
• Professor: Shang Tang

Document Summary

Introduction to valuation: the time value of money- ch. 5. Future value and compounding: future value- later money on a time line, the amount an investment is worth after 1 or more periods, also compound value. If you invest for 1 period at an interest rate of r, your investment grows at (1 + r) per dollar invested. Interest rate- exchange rate between earlier money and later money: discount rate, cost of capital, opportunity cost of capital, required return. 1050: compound results in more $ after 2 years, general formula, fv = pv (1 + r)^t. = lower pv: present value- important relationship ii, for a given time period- the higher the interest rate, the smaller the present value, when r is bigger, the denominator is bigger, and the pv is smaller. If you know pv and fv, you can calculate the interest rate you would need to earn that fv: rearrange the basic pv equation and solve for r.