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FINE 2000 Chapter Notes - Chapter 4: Effective Interest Rate, Annual Percentage Rate, Real Interest Rate

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coffeeduck671
24 May 2012
School
York University
Department
Finance
Course
FINE 2000
Professor
H A M D I D R I S S

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Document Summary

Future value (fv): amount to which an investment will grow after earning interest. Simple interest: interest earned only on the original investment; no interest is earned on interest. Future value interest factor: future value of a current cash flow of . Present value (pv): value today if a future cash flow (a dollar today is worth more than a dollar tomorrow) Discount rate: interest rate used to compute present values of future cash flows. **note: time it takes an investment to double in value equals approximately 72/r, where r is expressed as a percentage. (ex. doubling period is 8 years= 72/8= 9 percent) To find the future value of a stream of cash flows, calculate the future value of each flow and then add them. Present value of a stream of cash flows is the amount you would have to invest today to generate that stream. Annuity: equally spaced and level stream of cash flows.

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Related Questions

Time Value of Money Problems

Calculate the present value of the following investment: (a) Future Value: $123,000, (b) Number of Periods: 10, and (c) Interest Rate: 6%.

Calculate the future value of the following investment: (a) Present Value: $12,000, (b) Number of Periods: 13, and (c) Interest Rate: 4%.

Calculate the number of periods for the following investment: (a) Present Value: $30,000, (b) Future Value: $98,328, and (c) Interest Rate: 6%.

Calculate the Interest Rate for the following investment: (a) Present Value: $12,000, (b) Future Value: $25,000, and (c) Number of Periods: 14.

Linda Roy received a $205,000 inheritance after taxes from her parents. She invested it at 6.5% interest compounded quarterly for 8 years. A year later, she sold one of her rental properties for $215,000 and invested that money at 5.5% compounded semiannually for 7 years. Both of the investments have matured. She is hoping to have at least $505,000 in 12 years compounded annually at 4.5% interest so she can move to Hawaii.


Future Value of Inheritance Investment: $
Future Value of Rental Property Investment: $
Present Value of Final Investment: $
Future Value of Final Investment: $
Will she meet her goal?
Yes
No

Differentiate future value from present value and explain how compound interest differs from simple interest