BU283 Chapter Notes - Chapter 3: Discount Window, Compound Interest, Interest
Document Summary
Bu283 chapter 3: introduction to the time value of money. Present value: current dollar value of a future amount. Quoted rate/nominal rate/annual percentage rate (apr): simple interest rate for a whole year, as opposed to the periodic rate, which is the rate for an individual compounding period. Future value: value of a present amount at a future date, found by applying compound interest rate over specific period of time. Simple interest: interested earned on the original principal only. Compound interest: interest earned on the sum of the original principal plus reinvested interest from earlier periods. 2. 1 compound interest: future value over multiple periods. Annual compounding: compound interest calculated with a compounding interval of 1 year. Compounding: process of computing future values where interest is earned on reinvested interest. Each period of compounding increases exponent by one. Future balance increases if periods and/or interest rates increase. As the number of compounding periods increase, the future balance increases.
