Summary 2 Financial Markets

A snapshot of the summary - 2 Financial markets

• 4 The meaning of Interest Rates

• 4.1 The Timeline

• What are the two types of cashflows?

  Inflows (positive) and outflows (negative -)
• 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 semester

  Timeline:

• 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
• 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
• 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 interest rate 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

• 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).