Lecture 6

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

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1 Econ 102 Fall 2006 Lecture 6 Present Value

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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

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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

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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

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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 p Y 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 + = + + +

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Absence of Arbitrage 1 1 1 1 1 R p B B p Y p C + = - ( 29 ( 29 ( 29 ( 29 2 1 2 2 2 1 2 2 2 1 1 1 1 1 p r C p C p r Y p Y r p
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## This note was uploaded on 09/27/2009 for the course ECON 102 taught by Professor Serra during the Fall '08 term at UCLA.

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Lecture 6 - Econ 102 Fall 2006 Lecture 6 Present Value 1...

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