[Finance] 1 Time Value of Money

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