Ch27_The_Basic_Tools_of_Finance_金融基本工具.pptVIP

Principle of Economics Macroeconomics By dersen.guo@ Course Outline Chapter 27 The Basic Tools of Finance PV (present value) and FV (future value) The effects of compound growth How risk-averse people reduce the risk How asset prices are determined Finance Finance is the field that studies how people make decisions regarding: 1) The allocation of resources over time 2) The handling of risk. The Time Value of Money $100 today$100 tomorrow$100 a year out How to compare money in different times? For example: $100 a year out and $110 two years out? Is a project with a investment of $1,000,000 today and with future payoffs of $100,000 in the following 15 years profitable or not? Present Value(PV) Present Value: Measuring the time value of money Present value refers to the amount of money today that would be needed to produce, using a certain interest rates, a given future amount of money. Present Value(PV) Present Value(PV) In order to compare values at different points in time, compare their present values. Example 1 Firms undertake investment projects if the present value of the project exceeds the cost. Example 2 Present Value Future Value If r is the interest rate, then an amount X to be received in N years has present value of: PV= X/(1+r)N Future Value (FV): The amount of money in the future that an amount of money today will yield, given a certain interest rates Compounding Rule of 70 Compounding: the interest earned remains in the bank account to earn additional interest in the future. Rule of 70: Example: if you save $1,000 in the bank and earn a fixed interest rate of 5%, how long it will take for your saving to grow to $2,000? Managing Risk A person is said to be risk averse if she exhibits a dislike of uncertainty. Most people are risk averse. Dislike bad things happening to them Dislike bad things more than comparable good things Pains are always much bitter Diminishing marginal utility How to reduce risk? 3 ways to