Class Notes - 10-17-07

Class Notes - 10-17-07 - Macroeconomics Class Notes...

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Macroeconomics – Class Notes – 10/17/07 CHAPTER 14: TOOLS OF FINANCE (CON’T) Think about the present value as the amount of money required to attain the future value (FV) o It would take a lower amount to grow to the same amount of money in the future (FV) Coupon rate – the percent of the face value (Coupon rate) * (Face value of a bond) = (Example) == (10%) * ($10,000) = $1,000 (this is the interest payment) RISK Risk Adverse : For the same rate of return, people usually prefer less risk. o The pain of the loss of “X” utility is actually greater than the equivalent utility gained. (Loss is worse than gain) EXAMPLE: Each year 12 ships set sail for New World but only 1 returns. That boat brings in 4,800% profit! ( WHEN YOUR SHIP COMES IN!!!! ) But each merchant only wealthy enough to outfit one ship? What to do? RISK – INSURANCE Insurance Industry – Spreads risk Willing to pay premium to forego loss Casualty / Property / Life Insurance
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This note was uploaded on 04/15/2008 for the course ECON 101 taught by Professor Golden during the Fall '07 term at Allegheny.

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Class Notes - 10-17-07 - Macroeconomics Class Notes...

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