曼昆宏观经济学英文版27basic-tools.pptVIP

27 The Basic Tools of Finance Finance is the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk. PRESENT VALUE: MEASURING THE TIME VALUE OF MONEY Present value refers to the amount of money today that would be needed to produce, using prevailing interest rates, a given future amount of money. PRESENT VALUE: MEASURING THE TIME VALUE OF MONEY The concept of present value demonstrates the following: Receiving a given sum of money in the present is preferred to receiving the same sun in the future. In order to compare values at different points in time, compare their present values. Firms undertake investment projects if the present value of the project exceeds the cost. PRESENT VALUE: MEASURING THE TIME VALUE OF MONEY If r is the interest rate, then an amount X to be received in N years has present value of: X/(1 + r)N PRESENT VALUE: MEASURING THE TIME VALUE OF MONEY Future Value The amount of money in the future that an amount of money today will yield, given prevailing interest rates, is called the future value. FYI: Rule of 70 According to the rule of 70, if some variable grows at a rate of x percent per year, then that variable doubles in approximately 70/x years. MANAGING RISK A person is said to be risk averse if she exhibits a dislike of uncertainty. MANAGING RISK Individuals can reduce risk choosing any of the following: Buy insurance Diversify Accept a lower return on their investments Figure 1 Risk Aversion The Markets for Insurance One way to deal with risk is to buy insurance. The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return agrees to accept all or part of the risk. Diversification of Idiosyncratic Risk Diversification refers to the reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks. Diversification of Idiosyncratic Risk Idiosyncratic risk is the risk that affec