1 / 10

INTRODUCTION TO INTERTEMPORAL ANALYSIS Friday, October 20

INTRODUCTION TO INTERTEMPORAL ANALYSIS Friday, October 20. Common Measures of Change. Change = (FV-PV) (1,177.6 - 984.7) = 192.9 Percentage Change = (FV-PV)/PV =(1,177.6 - 984.7)/984.7 = .195 = 19.6%. Compounding. The Formula FV = PV*(1+g) T Initial value / present value = PV

jeanne
Download Presentation

INTRODUCTION TO INTERTEMPORAL ANALYSIS Friday, October 20

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. INTRODUCTION TO INTERTEMPORAL ANALYSISFriday, October 20

  2. Common Measures of Change Change = (FV-PV) (1,177.6 - 984.7) = 192.9 Percentage Change = (FV-PV)/PV • =(1,177.6 - 984.7)/984.7 = .195 = 19.6%

  3. Compounding • The Formula • FV = PV*(1+g)T • Initial value / present value = PV • Final value / future value = FV • Average growth rate or interest per period = g • Number of time periods = T

  4. Future Value Example • Q. What will the population of India be in the year 2020 if the population in 1985 was 751 million and the growth rate is 2.5% a year? • A. The initial value is 751, the growth rate is 2.5% (.0251), and the time horizon is 35 years.

  5. Average Growth Rate Example • Q.What was average yearly rate of wage growth if wages grew from $102 in 1970 to $389 in 1989? • A. The present value is 102, the future value is 389, and the time period is 19.

  6. Present Value Example • Q. How much will I need to save today to have $1,000 in 3 years if the interest rate is 8%.? • A. The end value is $1,000, the time horizon is 3 years, and the growth rate is 8%..

  7. An Introduction to the Mathematics of Finance • Q: What is a Bond? • A: A promise to pay in the future • Q: What is the price of a Bond? • A: How much you need to pay today to ‘buy’ the future payment(s)? • Q: What does the bond’s price depend on? • A: How fast money grows

  8. Determining the Price of a Bond The Deal: • On January 1 you are offered the following deal: $100 on January 1 for the next three years The Starting Point: • A dollar a year from now is not worth a dollar today so we must convert the ‘future’ dollars to ‘‘present’ dollars.

  9. The Framework: • Compounding formula provides framework: PV = 100/(1+r) + 100/(1+r)2 + 100/(1+r) 2 r = expected interest rate (growth rate of money)

  10. The Key to Intertemporal Analysis • The Compounding Formula • FV = PV*(1+g)T

More Related