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1、Chapter5InterestRateMoneyrepresentspurchasingpower;apersonwhohasmoneycanpurchasegoodsorservicesnow.Ifsomeonedoesnothavemoneynowandwantstomakepurchases,he/shecanrentpurchasingpowerbyborrowing.Likewise,ifsomeoneelsehasmoneynowandiswillingtopostponepurchasestothefuture,he/shecanrentoutpurchasingpower
2、.2021/9/92Chapter5InterestRatePresumably,thewillingnesstopostponepurchasesintothefutureisafunctionofthereward—thatis,theinterestrate.Inparticular,thehighertheinterestrate,thegreatertherewardand,hence,thegreaterthewillingnesstopostponepurchasesintothefutureandlendinthepresent.Similarreasoningapplie
3、sontheborrowingside.Wecanthinkofsomeonewhowantstopurchasegoodsandservicesbutisshortofthenecessaryfundsashavingtwooptions:(1)borrownowandpurchasenowor(2)savenowandpurchaselater.Sincethewillingnesstoborrowdependsonthecost,amongotherthings,wecanconcludethatthehighertheinterestrate,thelessattractiveis
4、option(1)andthemoreattractiveisoption(2).1.TheTimeValueofMoney2021/9/93Chapter5InterestRateLendinginthepresentenablesspendinginthefuturethesumofwhatislentplustheinterestearned.Borrowinginthepresentenablesspendinginthepresent,butrequirespayingbackinthefuturewhatisborrowedplusinterest.Sincetheintere
5、strateisthereturnonlendingandthecostofborrowing,itplaysapivotalroleinspending,saving,borrowing,andlendingdecisionsmadeinthepresentandbearingonthefuture.Theconceptwehavebeendiscussingiscalledthetimevalueofmoney.Simplyput,theinterestraterepresentsthetimevalueofmoneybecauseitspecifiesthetermsuponwhic
6、honecantradeoffpresentpurchasingpowerforfuturepurchasingpower.2021/9/94Chapter5InterestRate1.Compounding:FutureValuesWhatisthefuturevalueofonedollardepositedinaninterest-bearingaccounttoday?Toanswerthisquestion,let’sstartwithadefinition:futurevalueisthevalueonsomefuturedateofaninvestmentmadetoday.
7、Saythattodayyouinvest$100inasavingsaccountthatguarantees5percentinterestperyear.Afteroneyear,you’llhave$105(theinvestmentatitspresentvalueof$100plus$5ininterest).Sothefuturevalueof$100oneyearfromnowataninterestra
