money 101 | finance-lectures.com1 money, time, and interest daniel folkinshteyn, phd ...
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Money 101 | finance-lectures.com 1
Money, time, and interest
Daniel Folkinshteyn, PhDhttp://finance-lectures.com/[email protected]
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Learning objectives
Explain the meaning of interest rate Calculate basic interest amounts Describe the nature of compound interest Calculate interest over multiple compounding
periods Describe how interest works for you (against
you) in investments (loans)
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Prerequisites
Percentages
Exponents
Basic algebra
For refresher: https://www.khanacademy.org/math/algebra-basics
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Time value of money
Alice Bob
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Rate of return
Arrangements:
Debt – fixed amount promised back
Equity (ownership stake) – fraction of future profits
Return: cost of using other people's money
Expressed as percentage of amount invested
Usually expressed as annualized percentage
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Interest rate calculation
Invest $100, at 5% annual rate
At the end of the year, you have:
100 + 5% of 100 = 100 + 0.05*100 = 105
100 + 0.05*100 = 100 * (1 + 0.05) = 105
P * (1 + r) = F
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Rates over time
Time Amount
0 100
1 100*1.05 = 105
2 105*1.05 = 110.25
= 100*1.05 + 5*1.05
= (100*1.05)*1.05 = 100*1.05^2 = 110.25
3 110.25*1.05 = 100*1.05^3 = 115.7625
P * (1 + r)^t = F
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Quiz 1
How much money do you have if you start with 100, get 5% rate of return, and wait for 5 years?
100 * 1.05^5 = 127.628
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Testing it out
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Additional reading
A History of Interest Rates
by Sidney Homer and Richard Sylla
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Attributions
All images, unless otherwise noted, are sourced from pixabay.com or Wikimedia Commons, and are licensed under CC0, public domain.