MS&E 147 Lecture 2: MS&E 147 Lecture 2
1 Feb 2017
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Review sessions on friday same time and place as class time. Hsm derivatives, hedge, insurance, securities, otc, risk, yield. Money worth more to people and companies received earlier than later. Same amount of money buy less stuff later as price levels rise (inflation) Real and nominal interest rates (cid:4666)(cid:883)+(cid:1866)(cid:1867)(cid:1865)(cid:1866)(cid:1864) (cid:1857)(cid:4667)=(cid:4666)(cid:883)+(cid:1857)(cid:1864) (cid:1857)(cid:4667)(cid:4666)(cid:883)+(cid:1866)(cid:1858)(cid:1864)(cid:1867)(cid:1866) (cid:1857)(cid:4667) Cannot add different values of money at different points in time. Must convert everything to a future value, or more commonly, present value, and then. This is less than plan 2, which was to pay 21,000 (save 700) Same calculations, plug 12% into equations (1. 12 instead) See that plan 2 is cheaper now. High interest rate - want to pay later. Future value conversion ( worth in t years): Suppose take out loan 14%, your money invested at 11. 5% interest. Other things equal, bottom line is do not pay a higher rate than earn!
