金融英语课件李丽 马跃ISBN 9787810788175 PPTchapter_5.pptVIP

Chapter 5 Interest Rate Chapter 5 Interest Rate Money represents purchasing power; a person who has money can purchase goods or services now. If someone does not have money now and wants to make purchases, he/she can rent purchasing power by borrowing. Likewise, if someone else has money now and is willing to postpone purchases to the future, he/she can rent out purchasing power. 1. The Time Value of Money Presumably, the willingness to postpone purchases into the future is a function of the reward—that is, the interest rate. In particular, the higher the interest rate, the greater the reward and, hence, the greater the willingness to postpone purchases into the future and lend in the present. Similar reasoning applies on the borrowing side. We can think of someone who wants to purchase goods and services but is short of the necessary funds as having two options: (1) borrow now and purchase now or (2) save now and purchase later. Since the willingness to borrow depends on the cost, among other things, we can conclude that the higher the interest rate, the less attractive is option (1) and the more attractive is option (2). Lending in the present enables spending in the future the sum of what is lent plus the interest earned. Borrowing in the present enables spending in the present, but requires paying back in the future what is borrowed plus interest. Since the interest rate is the return on lending and the cost of borrowing, it plays a pivotal role in spending, saving, borrowing, and lending decisions made in the present and bearing on the future. The concept we have been discussing is called the time value of money. Simply put, the interest rate represents the time value of money because it specifies the terms upon which one can trade off present purchasing power for future purchasing power. 1. Compounding: Future Values What is the future value of one dollar deposited in an interest-bearing account today? To