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Chapter 3 Book Notes FIN 301 UIC

by: David Kavalerchik

Chapter 3 Book Notes FIN 301 UIC Fin 301

Marketplace > University of Illinois at Chicago > Finance > Fin 301 > Chapter 3 Book Notes FIN 301 UIC
David Kavalerchik
GPA 3.2

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About this Document

These notes cover the entirety of chapter 3 from "Financial Management: Core Concepts." It includes Future/Present value and the Rule of 72.
Intro to Finance
Ozgur Arslan Ayaydin
Class Notes
UIC FIN finance flames Osgur FIN301 301 notes studysoup study soup blue
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This 3 page Class Notes was uploaded by David Kavalerchik on Tuesday February 2, 2016. The Class Notes belongs to Fin 301 at University of Illinois at Chicago taught by Ozgur Arslan Ayaydin in Spring 2016. Since its upload, it has received 81 views. For similar materials see Intro to Finance in Finance at University of Illinois at Chicago.


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Date Created: 02/02/16
____________________________________________________________ Future Value and Compounding Interest Time value of money (TVM) refers to a dollar in hand today being worth  more than a dollar  received in the future because you can invest today’s dollar in  an interest­bearing account that  grows in value over time. We call this the future value (FV). The Single­Period Scenario Principal x Interest Rate = interest earned  The principal + interest earned = the future value of the principal.  Deposit initial principal of $100 @ 5% interest. You’re paid out in a lump sum end of the year.  That $105 is the future value of your $100 principal.  The Multiple­Period Scenario Let’s say you leave that $105 in the same account for another year. That $105 will earn another  5%  ­­­>   $100 × 0.05 + $5.00 × 0.05 = $5.25 The additional 25 cents is interest on interest and reflects the compounding of interest.  At the end  of two years, the account has $110.25. future value = deposit × (1 + r) × (1 + r) or FV = PV × (1 + r)^n __________________________            Key FV = future value  PV = present value  r = interest rate  n = number of time periods __________________________ ____________________________________________________________ ____________________________________________________________ Present Value and Discounting The Single­Period Scenario Determine how much $x one year from now is worth today at x% interest over the year. How much do I need to put away now for it to become $x in the  future at x% interest rate? *You don’t need to memorize  both the PV & FV equations. When given a problem just use the FV equation and use simple algebra to solve for PV. The Multiple­Period Scenario As stated before, use the same FV equation, plug in your values and solve for PV.  ____________________________________________________________ Rearranged to solve for the interest rate: Rearranged to solve for the # of periods:  Rule of 72: To find the length of time it takes to double your money, just divide 72 by the  interest rate.


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