ECO 301 Lecture Notes - Lecture 4: Cash Flow

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sangriamosquito588

13 Sep 2016

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The same amount of money at different points in time as well as different amounts of money at the same point in time are easy to compare. Pv = present value, cf = cash flow (future) i = interest rate: cf = pv x (1 + i)^n pv = cf/(1 + i)^n. This formula and concept tells an investor how much they need to invest today in order to achieve a desired future cash flow at a given interest rate. To compare payments at different points in time you must use their present values. Yield to maturity interest rate that equates the present value of cash flow payments received from debt instruments with its value today. Implied interest rate that could be calculated even for credit market instruments that don"t have a well-defined interest rate in its usual meaning. Find the ytm of the following examples: simple loan: pv = 100, cf = 110, n = 1.

Related Questions

The time value of money refers to the issue of:

A. what the value of the stream of future cash flows is today.

B. why a dollar received tomorrow is worth more than a dollar received today.

C. what the time required to double an amount of money.

D. why people prefer to consume things at some time in the future rather than today.

amaranthmouse551

Your niece just started her college career with a major in economics. She is curious as to the interrelationship between the success of an economy and the financial markets, concepts, and financial institutions. Accordingly, she has developed a list of questions addressing these issues and has asked that you explain the ideas.

What are the financial markets and what purposes do they serve?

What are financial intermediaries? How do these intermediaries function in the economy?

What is a federal government budget deficit? What is the national debt? How does a budget deficit affect the economy?

She is also curious about the time value of money concepts. Specifically, she has the following questions about these concepts:

Why are consumers considered to be risk averse? What methods could used to deal with risk?

It has been said that a dollar received today is worth more than a dollar received tomorrow. What does this mean and what is the significance to the economy?

What is the difference between the present value of a future sum of money and the future value of a present sum of money? What is the significance of these concepts to economics?

If you deposited $1,000 in an account paying 6% interest compounded annually, how long would it take to double?

lavendermacaw662

1-What are the financial markets and what purposes do they serve?

2-What are financial intermediaries? How do these intermediaries function in the economy?

3-What is a federal government budget deficit? What is the national debt? How does a budget deficit affect the economy?

She is also curious about the time value of money concepts. Specifically, she has the following questions about these concepts:

4-Why are consumers considered to be risk averse? What methods could used to deal with risk?

5-It has been said that a dollar received today is worth more than a dollar received tomorrow. What does this mean and what is the significance to the economy?

6-What is the difference between the present value of a future sum of money and the future value of a present sum of money? What is the significance of these concepts to economics?

7-If you deposited $1,000 in an account paying 6% interest compounded annually, how long would it take to double?

periwinklerhinoceros141

ECO 301 Lecture Notes - Lecture 4: Cash Flow

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