14_01_lec32 - 1 Present Discount Value 1 14.01 Principles...

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as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Present Discount Value 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen December 5, 2007 Lecture 32 Investment, Savings, Time and Capital Markets Outline 1. Chap 15: Present Discount Value 2. Chap 15: Bond 3. Chap 15: Effective Yield 4. Chap 15: Determine Interest Rate 1 Present Discount Value Present discount value (PDV) determines the value today of a future flow of income. Today 1 year 2 year Payment A 100 100 0 Payment B 20 100 100 Table 1: Two Payments. Consider the two payments, A and B, in Table 1. Because the present value of 1 dollar in n years is 1 , (1 + r ) n where r is the interest rate, the present values of A and B are 100 100 + , 1 + r and 100 100 20 + + , 1 + r (1 + r ) 2 respectively. If r is low, PV of B is larger than PV of A. If
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14_01_lec32 - 1 Present Discount Value 1 14.01 Principles...

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