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Summary 2 Financial markets

Course
- IFM
- 2021 - 2022
176 Flashcards & Notes
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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

  • 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

  • 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

  • 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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