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Unformatted text preview: 81Chapter 8: Saving and InvestmentRecall:GDP=Y= C + I + G + (X  M)Incomeexpenditure identityAssume that X = M or (XM) = 0Then:GDP = Y = C + I + GI = Y C GSubtract and add government taxes T to the right hand side of the above equationI = Y C T G + T = (Y C T) + (T G)Inv=Private Saving + Public Saving82Government BudgetIf T  G > 0 Budget surplusPublic savingIf T  G < 0 Budget deficitPublic dissavingNational debt: is an accumulation of past deficits minus surplusesFor a discussion of the federal budget see:http://www.budget.gc.ca/2008/newsnouvelles/newsnouvelleseng.asp83Also:RecallGDP = Y = C + I + GI = Y C GBut Y C G is also called national savings, SSubstituting S for Y C G we have the identityS = I84Financial Markets: Stock MarketBond MarketThe Bond MarketThe interest rate on a new bond depends on the:Length of MaturityCredit riskTax treatmentNext we will look at:Compound interest, Discounting, Present value85Future ValueoFV(j)=PV*[1 + R]jj = number of time periodsExample:FV(14)=$100 * (1+ 0.05)^14==$197.99DiscountingGiven FV(j) = PV*(1 + R)^jThen we can rearrange in to find a formula for present value (PV)PV = FV(j)/(1+R)^jAt 5% intrest, $197.99 fourteen years from now is worth $100 today86Problem:Calculate PV:oPV=FV(j)/[1 + R]j oFV=$100oR = 5%oj = 1$95.2487Problem:Calculate PV:oPV=FV(j)/[1 + R]j oFV=$100oR = 7%oj = 193.4688Problem:Calculate PV:oPV=FV(j)/[1 + R]j oFV=$100oR = 5%oj = 290.7089Interest Rate DeterminationInterest rate is the percentage yield on a financial security such as a bondoInterest rate = dollar payment per year * 100Price of the bondThis formula states that the higher the price of a bond, other things the same, the lower is the interest rateExample: suppose a government of Canada sells a bond that promises to pay $10 a yearIf the price of the bond is $100, the intrest rate is 10 percent a year  $10 is 10 percent of $100Using the same logic, if the price of the bond is $50, and the bond pays $10 a year, what is the interest rate per year?...
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This note was uploaded on 02/11/2010 for the course ART AFM101 taught by Professor Mr.lushman during the Spring '10 term at University of Toronto Toronto.
 Spring '10
 Mr.Lushman

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