MGT 181 Lecture Notes - Lecture 2: Cash Flow, Interest, Compound Interest
25 Dec 2015
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Present value: the value of a given stream of future cash flows. Future value: the value in the future of cash flow invested today. Interest rate: the rate of return required by an investor for a given time period and level of risk. If there is a higher risk, the investors will require a higher rate. Similarly, if the investment is longer term, the investors will require a higher rate of return. Future value: suppose you invest for 1 year at 5%. Simple interest: periodical interest on the principal amount. The interest earned from previous year is not included in the principal amount. Compound interest: includes interest earned on interest earned prior years. Calculating present value is the same as discounting. The discount rate, interest rate and required rate of return are the same thing. Annuity: a finite series of equal payments that occur at regular intervals.
