Interest

In this lesson

1. 0:00 Time value of money explained
2. 0:39 Why $1,000 today beats $1,000 tomorrow
3. 2:30 Investment, risk, and inflation impact
4. 5:09 Bringing cash flows to present value
5. 6:03 Simple interest vs compound interest
6. 8:02 How compound interest accelerates growth
7. 9:34 Compound interest calculation over time
8. 11:44 Discounting: reversing the compounding process
9. 14:31 Present value factor and discount tables
10. 16:45 Worked example: calculating present value
11. 20:03 Comparing present values across scenarios
12. 23:41 Nominal rates vs effective annual rates
13. 28:18 Effective rate comparison: extreme example

About this lesson

By the end, you'll confidently convert between nominal and effective interest rates, and apply discount factors to bring future cash flows back to present value terms. The lesson begins with a fundamental question: would you rather have £1,000 today or in one year's time? You'll discover the three key reasons to prefer money now: investment opportunities, reduced risk, and the erosion of purchasing power through inflation. From there, you'll work through compound interest using practical examples, seeing how £10,000 invested at 10% grows to £16,105 over five years. The critical insight is that discounting reverses this process—it brings future figures back to today's value, allowing you to make fair comparisons between cash flows occurring at different points in time. You'll then tackle the distinction between simple and compound interest, understand how to use present value factors and discount tables, and work through multi-step examples where different cash flows, time periods, and interest rates need to be compared on an equal footing. The final section clarifies nominal versus effective interest rates, showing you why a 12% nominal rate compounded monthly (12.68% effective) is not the same as a 12% rate compounded annually, and how to calculate the true annual return for any compounding frequency. This foundational knowledge is essential for FM, AFM, and other papers where investment appraisal and financial decision-making are core activities.

Duration: 31m