Download document

Summarize: Present Value/ Future
Value/ Compounding
SOLVE: Suppose you are depositing an
amount today in an account that earns
5% interest, compounded annually. If
your goal is to have $5,000 in the
account at the end of six years, how
much must you deposit in the account
today?
Solution
The following information is given:
• future value = $5,000
• interest rate = 5%
• number of periods = 6
• We want to solve for the present
value.
• present value =
future value / (1 + interest rate)number of periods
PV = FV/ (1 + r)t or n
PV = $5,000 / (1 + 0.05)6
PV = $5,000 / (1.3401)
PV = $3,731
If the interest rate is 7%. What
is the present value of $150 to
be received in 10years.
A company has an investment project that
would cost $10million today and yield a
payoff of $15million in 4 years.
a. Should the firm undertake the
project if the interest rate is 11%?
10%? 9%? 8%?
b. Can you figure out the exact cutoff
for the interest rate between
profitability and nonprofitability.
• 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.
• 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.
• If r is the interest rate, then an
amount X to be received in N or T
years has present value of:
X/(1 + r)N
• 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.
• Money is the set of assets in an
economy that people regularly
use to buy goods and services
from other people.
• Money has three functions in the
economy:
–Medium of exchange
–Unit of account
–Store of value
• Analyze each function in small
group discussion.
• Medium of Exchange
–A medium of exchange is an item
that buyers give to sellers when
they want to purchase goods and
services.
–A medium of exchange is anything
that is readily acceptable as
payment.
• Unit of Account
–A unit of account is the yardstick
people use to post prices and
record debts. (EXPLAIN)
• Store of Value
–A store of value is an item that
people can use to transfer
purchasing power from the present
to the future.(EXPLAIN)
• Liquidity
–Liquidity is the ease with which an
asset can be converted into the
economy’s medium of exchange.
• Commodity money takes the form of
a commodity with intrinsic value.
–Examples: ?
• Fiat money is used as money
because of government decree.
–It does not have intrinsic value.
–Examples: ?
• Commodity money takes the form of
a commodity with intrinsic value.
–Examples: Gold, silver, food
• Fiat money is used as money
because of government decree.
–It does not have intrinsic value.
–Examples: Coins, currency, check
deposits
• Analyze the following statements:
1. “This note is legal tender for all
debts, public, and private.”
2. “Federal Reserve Note.”
• Which of the following are money in
the U.S. economy? Which are not?
Explain your answers by discussing
each of the three functions of
money?
a. A U.S. penny
b. A Picasso painting
c. A plastic credit card
• What characteristics of an asset
make it useful as a medium of
exchange? A store of value?
• 1. Must be widely accepted(so all
transactions can be made in terms of
it)
• 2. Recognized easily as money(so
people can perform transactions
easily and quickly)
• 3. Divisible (make change)
• 4. Difficult to counterfeit (can’t print
own money)
• Make a table and evaluate how well
each of the following items would
perform the functions of money in
today’s economy. Fulfil +, doesn’t
Fulfil -, ? Not sure
• 1.Medium of exchange
• 2. Store of Value
• 3. Standard of Value.
•
•
•
•
•
•
•
•
•
Salt
Cattle
Gold
Copper Coins
Beaver pelts
Personal checks
Debit card
Credit card
$1 bill and $100 bill
• Characteristics of Money: Discuss
these characteristics of money.
1. Portability
2. Uniformity
3. Acceptability
4. Durability
5. Stability in Value
• Rate the items from the previous
activity +, -, ? for each characteristic.
•
•
•
•
•
•
•
•
•
Salt
Cattle
Gold
Copper Coins
Beaver pelts
Personal checks
Debit card
Credit card
$1 bill and $100 bill
• Free Write:
Why might factors such as ease of
storage, difficulty in counterfeiting and
security of electronic transfer of funds
also be characteristics that you might
use in evaluating money?
• The quantity of money circulating in
the United States is sometimes called
the money stock.
• Included in the measure of the
money supply are currency, demand
deposits, and other monetary assets.
Discuss the conceptual definition of
money. Keep in mind, the complexity
of the real world and our rapid
evolving financial system prevent
agreement on a single measure of
money.
• Define and measure the money
supply into three definitions:
–Label them M1, M2 and M3
Currency(coins and paper)
plus Checkable deposits = M1
Savings deposits, including money
market deposits accounts, plus small
time deposits, plus money market
mutual fund balances equals = M2
Plus large time deposits = M3
$523
$578
$1101
$1812
$1024
$890
$4827
$2026
$6853
Describe the Federal Reserve:
-Who are they?
-Describe their structure.
-What 2 jobs do the Fed perform?
• Explain the primary way in which the
Fed increases and decreases the
money supply.
• Your uncle repays a $100 loan from
Tenth National Bank by writing a
$100 check from his TNB checking
account. Use T-accounts to show the
effect of this transaction on your
uncle and on TNB. Has your uncles
wealth changed? Explain.