Class 5 Chapter 4 Discussion Outline

Class 5 Chapter 4 Discussion Outline - Class 5 Chapter 4...

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Class 5 Chapter 4 Outline: Future Value, Present Value, and Interest Rates Class Overview This class explores interest rates, present value and future value via various applications Important Points Interest rates are an import regulator of behavior. They signal the cost of choices between the present and the future. Alternatively, they indicate the compensation required to cover the opportunity cost of lending—giving up use now—for return later, a cost that must be covered by the borrower. Personal Discounting, the foundation of interest rates Interest rates reflect individual’s attitudes with respect to the future: Consumption deferring behavior is determined by a personal discount rate (pdr) relative to the market rate; people with a low pdr are more likely to save, while people with a high pdr are more likely to borrow. Everyone has a pdr—an attitude or perspective toward the future that describes the rate at which they require compensation for postponing consumption (saving now) It is lower proportional to wealth; higher proportional to age; higher proportional to future prospects. 1. Everyone has a p ersonal d iscount r ate (rate of time preference) that depends upon: a. Age—older increases pdr b. Health—good health lowers pdr c. Current wealth—more wealth decreases pdr d. Productivity prospects—increases pdr e. Personal ability to delay gratification—decreases pdr 2. Population can be arrayed from highest to lowest pdr
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Choose the population median pdr that divides the population into two groups—half with higher pdr and half lower. Which group will likely be borrowers?
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Class 5 Chapter 4 Discussion Outline - Class 5 Chapter 4...

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