What is interest rate?
" everyone want the money today, no one knows what will happen tomorrow, price will rise"------- the reasons of interest rate.
you pay your patient = gives you interest
Why interest rate changes?
- changes in opportunity costs: how patient am I for the money (I really think today is a good time to invest sth)- changes in inflation expectations : how much will the price raise (or govt print more money)
- changes in risk : how terrible things are going to be (wars, disasters)
---------> RISK INCREASES RATE!!!
What is compounding?
复利
count by years : Value in future = Present Value * (1 + r) ^ Y
if I count it by days, but not years : Vf = Vp * (1 + r/365)^365Y...
if I count by second : Vf = Vp*e^ry
What is discounting?
what is a cash flow in the future worth today.
Vp = Vf / （1+r）^Y
DiscountFactor = 1/(1+r)^Y
