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A snapshot of the summary - 2 Financial markets
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4 The meaning of Interest Rates
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4.1 The Timeline
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What are the two types of cashflows?Inflows (positive) and outflows (negative -)
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Give the timeline of this situation: ou have to pay 10.000$ tuition fee over 2 years; the payments must be made at the start of each semesterTimeline:
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4.2 The Three Rules of Time Travel
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What are the three rules of time travel?Rule 1: Only value at the same pint in time can be compared or combined.
Rule 2: To move cash flows forward in time you must compound it. (Future value)
Rule 3: to move a cash flow backward in time, you must discount it. (Present value) -
Suppose you invest $1000 in an account paying 10% interest rate per year. How much will you have on your account in 7 years? 20 years? 75 years?7 years: $ 1 948.72
20 years: $ 6 727.50
75 years: $ 1 271 895.37 -
You have the choice between $ 5 000 today (interest rate 10%) and $ 10 000 in five years, what do you choose?The $ 5 000, they will be worth $ 12 968.71 in 10 years
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If a bond will be worth $15 000 in 10 years with an interest rate of 6%, how much is it worth today?$ 8 375.92
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Suppose we plan to save $1000 today, and
$1000 at the end of each of the next two years.
If we can earn a fixed 10% interest rate on our
savings, how much will we have three years
from today?$ 3 641 -
How much is $ 10 000 in 5 years with
10ù interestrate worth today? And $ 5000 now worth in 5 years? And together that is?$ 6 209
$ 8 053 -
4.3 Valuing a Stream of Cash Flows
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You lend money and think you will be able to pay $5000 the first year and $ 8 000 the next 3 years. If the financier would otherwise earn 6% per year on his savings, how much can you borrow from him now?$ 24 890.65
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4.4 Calculating the Net Present Value
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Where is calculating the NPV useful for?To evaluate an investment decision. It compares the present value of cash inflows (benefits) to the present value of cash outflows (costs).
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