Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Using the basic formulas, how can we extend the concept of equivalence to determine interest?
Expert Solution
Step 1
Equivalence in terms of financial management refers to the gap between future consumption and current consumption.
Using Equivalence, a discounting rate of return is expected so that the cash flows on the same can be converted into present value.
To make these conversions, we first need to understand the “Time value of money”.
Time value of dollar means that worth of a dollar received today is different from the worth of a dollar to be received in future.
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