ap economics: module 24 terms

why is one dollar today worth more than one dollar in the future?

debts and savings accumulate interest

key concept of present value

can use IR to compare the value of a dollar realized (paid/received) today w/ the value of a dollar realized later

• evaluates costs + benefits as if they occured today (lowers complications due to time)

future value

the amount to which a current amount of money will grow as interest accumulates over a period of time

• how much money you will have in the future

present value

amount of money you must lend out today in order to have $X in N yrs.

• how much money you have now

present value of $1 received in N yrs.

$1/(1+r)^N

future value of today’s $1 in N yrs.

$1(1+r)^N

net present value

present value of current and future benefits minus the present value of current and future costs

how is the IR and the price of bonds related?

inverse relationship

• higher IR —> higher o.c. of holding money —> decreased value of present bonds (new ones will have higher value) —> lower bond price

how does an increase in the interest rate affect present values and future values?

present value will decrease, while future value increases