eco 202 ch 27 basic tools of finance
TRANSCRIPT
Chapter 27
Basic Toolsof
Finance
SurveyQuestion 1
What would you prefer?
A. Win 1,000 riyals
B. Flip a coin: 50 percent chance you win 2,000 riyals50 percent chance you win nothing.
SurveyQuestion 2
What would you prefer?
A. Lose 1,000 riyals
B. Flip a coin: 50 percent chance you lose 2,000 riyals50 percent chance you lose nothing.
Payback?
One year?
Five years?
Ten years?
Promissory Note
Trading paper for paper
I.O. U.
10 SARDr. Gale
Finance
Time and Risk
Key Formula 1
(1+r)N
r = rate N = number of periods
Future Value or FV
(1+r)N
r = 7% N = 3FV =?
1 1.0702 1.1453 1.225
N FV
(1+r)N
r = 10% N = 5FV =?
1 1.1002 1.2103 1.3314 1.4645 1.611
N FV
(1+r)N
r = 15% N = 3FV =?
1 1.1502 1.3233 1.521
N FV
(1+r)N
r = 15% N = 3FV =?
1 1.1502 1.3233 1.521
N FV
Key Formula 2
(1+r)N
r = rate N = number of periods
Present Value or PV1 Reciprocal
of the FV formula
(1+r)N
r = 7% N = 3PV =?
1 .9352 .8733 .816
N PV
1
(1+r)N
r = 10% N = 5PV =?
1 .9092 .8263 .7514 .6835 .621
N PV
1