ECON 2010 Chapter Notes - Chapter 27: Market Risk, Standard Deviation, Diminishing Returns

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5 May 2015

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Finance is the study of how people and businesses make decisions to allocate resources and manage risk over time. Present value: measuring the time value of money. A sum of money today is greater than that same sum of money in the future. This is because money received today can be invested and earn interest over time. Present value is amount of money today that would yield a given value in the future at current interest rates. Future value is the amount of money in the future that a given value today would yield at current interest rates. Compounding is the accumulation of money as an initial investment earns interest and interest is earned on interest. The process of calculating the present value of an amount of money in the future is called discounting. For a given interest rate and amount of money, r and x respectively,

Related Questions

Present Value Calculator Application: A bank wants to show its customers how much they would need to invest to achieve a specified financial goal (future value) in 5, 10, 15, 20,25, and 30 years. users must provide their financial goal (the amount of money desired after a specified number of years has elapsed), an interest rate, and the length of the investment in years. Create an application that calculates and displays the principal (initial amount to invest) needed to achieve the user's financial goal. Your application should allow the user to invest money for 5, 10, 15, 20,25, or 30 years. For example, if a customer want to reach the financial goal of $15,000 over a period of 5 years when the interest rate is 6.6%, the customer would need to invest $10,896.96 as shown below.

The present value calculation formula is given as: where:

p if the amount needed to achieve the future value

r if the annual interest rate (for example 6.6% if equal to 0.066)

n if the number of years

a is the future-value amount.

pearmanatee588

Your niece just started her college career with a major in economics. She is curious as to the interrelationship between the success of an economy and the financial markets, concepts, and financial institutions. Accordingly, she has developed a list of questions addressing these issues and has asked that you explain the ideas.

What are the financial markets and what purposes do they serve?

What are financial intermediaries? How do these intermediaries function in the economy?

What is a federal government budget deficit? What is the national debt? How does a budget deficit affect the economy?

She is also curious about the time value of money concepts. Specifically, she has the following questions about these concepts:

Why are consumers considered to be risk averse? What methods could used to deal with risk?

It has been said that a dollar received today is worth more than a dollar received tomorrow. What does this mean and what is the significance to the economy?

What is the difference between the present value of a future sum of money and the future value of a present sum of money? What is the significance of these concepts to economics?

If you deposited $1,000 in an account paying 6% interest compounded annually, how long would it take to double?

lavendermacaw662

1-What are the financial markets and what purposes do they serve?

2-What are financial intermediaries? How do these intermediaries function in the economy?

3-What is a federal government budget deficit? What is the national debt? How does a budget deficit affect the economy?

She is also curious about the time value of money concepts. Specifically, she has the following questions about these concepts:

4-Why are consumers considered to be risk averse? What methods could used to deal with risk?

5-It has been said that a dollar received today is worth more than a dollar received tomorrow. What does this mean and what is the significance to the economy?

6-What is the difference between the present value of a future sum of money and the future value of a present sum of money? What is the significance of these concepts to economics?

7-If you deposited $1,000 in an account paying 6% interest compounded annually, how long would it take to double?

periwinklerhinoceros141

ECON 2010 Chapter Notes - Chapter 27: Market Risk, Standard Deviation, Diminishing Returns

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