ECONOM 3229 Lecture Notes - Lecture 4: Credit Risk, Savings Account, Interest Rate
6 Apr 2015
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Document Summary
Interest or interest rate represents reward for lending money for: not being able to use money until it is repaid. Most financial instruments involve a promise paying money in the future. Interest rate is the key in valuing. Future value is the value on some future date of an investment made today. in savings account at 5% annual interest rate yields 100(1+0. 05) next year. Future value of any investment: fvn = pv(1+i)n. Present value is the value today of a payment that is promised to be made in the future. Present value of payment received n years in the future: pv = fv/(1+i)n. Present value is higher when: face value is higher, fv, shorter time period, n, lower interest rate, i. Money today has higher value than money tomorrow. The further in the future a payment is to be received, the smaller the present value.
