FINE 4050 Chapter 1-12: Personal-Finance-Notes-1 (1)
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Interest is the cost of borrowing; where compounding is the number of times in a year interest is calculated and added to the principal of the loan. The higher the frequency of your compounding, the more money you will receive at the end of your investment horizon. If you invest for n years at an interest rate of i% p. a. , compounded m times per year, at the end of n years, you will receive : (1 + Rate of return (valuation rate): the interest rate or return rate on a loan or investment respectively; the valuation rate links the pv and fv together. Present value (pv): the current worth of an amount of money or sequence of cash flows. Future value (fv): the value of an amount of money or sequence of cash flows at some specified time in the future: , = (1 + )8.