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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
future value of $X in 1 yr.
$X*(1+r)
r = interest rate
present value
amount of money you must lend out today in order to have $X in 1 yr.
works for benefits and costs
present value of $1 realized 1 yr. from now
$X = $1/(1+r)
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
Note 
Flashcard (20)