# l6 - 1 Econ 102 Fall 2006 Lecture 6 Present Value 2 Topics...

This preview shows pages 1–11. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 Econ 102 Fall 2006 Lecture 6 Present Value 2 Topics • Real and nominal interest rates • The Fisher equation • How to value an asset 3 Interest • Two periods • One good • Borrowing and lending • No uncertainty • B R is a real bond 4 Budget Constraints 1 1 R B Y C =- ( 29 2 2 1 R C Y r B = + + 2 2 1 1 1 1 C Y C Y r r + = + + + Today Tomorrow Lifecycle 5 Two Period Model Today Tomorrow The real rate of interest is the price of a good today relative to a good tomorrow Lending 6 Two Period Model Today Tomorrow Borrowing r is the real rate of interest 7 Absence of Arbitrage 1 1 qB A Y C + =- ( 29 2 2 1 C Y r A B = + + + 2 2 1 1 1 1 1 1 C Y C Y B q r r r + = + +- + + + Absence of arbitrage implies this is zero 8 Some Definitions • i is the nominal interest rate • r is the real interest rate • p 1 is the price of a good at date 1 • p 2 is the price of a good at date 2 • B is a nominal bond • B R is a real bond 9 Money and Interest 1 1 1 1 B pY p C =- ( 29 2 2 2 2 1 p C p Y i B = + + ( 29 ( 29 2 2 2 2 1 1 1 1 1 1 1 1 p C p Y C Y p i p i + = + + + 10 Absence of Arbitrage 1 1 1 1 1 R p B B pY p C + =- ( 29 ( 29 ( 29 ( 29 2 1 2 2 2 1 2 2 2 1 1 1 1 1 p r C...
View Full Document

{[ snackBarMessage ]}

### Page1 / 28

l6 - 1 Econ 102 Fall 2006 Lecture 6 Present Value 2 Topics...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online