m3l7 - Spring 2008 Module 3 Accounting Finance Lecture 7...

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David Robinson © D. Robinson, 2008 Spring 2008 Module 3 Accounting & Finance Lecture 7: The Time Value of Money Introduction to Bond Valuation
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Accounting & Finance Accounting Finance Managerial Financial Auditing How investors use their money How firms raise money Three financial statements Forms of business Income St. Balance Sheet St. Cash Flows
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Lecture Outline Inflation Long-run rather low . . . But is it really low now ? Time value of money Bonds as investments
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The Great Inflation
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Price of a “Value Meal” Current Price is $3.49 You will retire 40 years from now If Inflation is 2 percent your Mc Donald’s meal will cost $7.71
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Price of a “Value Meal” Current Price is $3.49 You will retire 40 years from now If Inflation is 3.5 percent your Mc Donald’s meal will cost $13.82
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Price of a “Value Meal” Current Price is $3.49 You will retire 40 years from now If Inflation is 8.0 percent your Mc Donald’s meal will cost $75.82!
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High Inflation Causes Social Problems When inflation is very high, it is almost impossible to save for the future: retirement children’s college education High inflation severely impacts people on fixed incomes and leads to social unrest
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Inflation peaked in 1974 and 1981 Would you settle for a 4 percent pay raise?
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What made the inflation “hump”? ® 74 1. Baby boomers’ boom—they all wanted houses and had higher earning power 2. Oil shocks 3. Central bankers mis-managed the money supply
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Is current inflation low?
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