Textbook Notes (368,802)
United States (206,116)
Economics (2,421)
ECON 20B (45)
Chapter 27

Ch. 27- Basic Tools of Finance .docx

3 Pages
Unlock Document

Mu- Chun Chen

Ch. 27: Basic Tools of Finance I. Present Value: Measuring Time Value of Money - finance: field of study of how people make decisions regarding the allocation of resources over time and handling risk o money today is more valuable than same amount in future o Present value: amount of $ today that would be needed, using prevailing interest rates to produce a given future amount of $ o Future value: amount of $ in future that an amount of $ today will yield, given prevailing interest rates o Compounding: accumulation of a sum of $ in bank account where interest earned remains in the account to earn additional interest in future o Formula: Future value = (1+r)^n x Present value  n= years, r= interest rate o Present value= (Future value)/(1+r)^n o Discounting= process of finding present value of future sum of $ o The increase of interest rate, the more you can earn by depositing your money in a bank o Quantity of loanable funds demanded declines when interest rate rises II. Managing Risk A. Risk aversion o risk aversion: dislike of uncertainty o utility: person’s $subjective measure of well being/satisfaction - t he more wealth the person has, the less utility he gets from each additional dollar o the flatter, the more wealth increases 1. Markets for insurance  insurance company will pay you annuity  insurance role is to spread risk around more efficiently  adverse selection: high risk person more likely to apply for insurance than low risk people b/c high risk would benefit from insurance
More Less

Related notes for ECON 20B

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.