chapter 22 investment and financial intermediaries

chapter 22 investment and financial intermediaries -...

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CHAPTER 22 Investment and Financial Intermediation
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Chapter Twenty-Two 2 of 19 Lecture Outline 1. Definition of investment 2. Theories of investment spending 3. The use of present value to compare the payoffs of an investment over time a. How interest rates affect the calculation of present value b. Nominal interest rates versus real interest rates 4. How financial intermediaries facilitate investment FYR
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Chapter Twenty-Two 3 of 19 Investment and  Financial Intermediation An investment, broadly defined, is an action that creates a cost today but provides benefits in the future.
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Chapter Twenty-Two 4 of 19 Evaluating the Future The present value of a payment to be received in the future is the maximum amount a person is willing to pay today to get that payment later. Present value = K__ (1 + i ) t As the interest rate increases, the opportunity cost of your funds also increases, so the present value of a given payment in the future falls.
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OPTIONS FOR A LOTTERY WINNER How can understanding the concept of present value help a lucky lottery winner? The lucky winner of a lottery was given an option: • Receive $1 million a year for 20 years. Receive $10 million today. Why would anyone take the $10 million today? To determine which payment option is best, our lottery winner would first need to: • Calculate the present value of $1 million for each of the 20 years. • Add up the result.
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chapter 22 investment and financial intermediaries -...

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