The Basic Ideas, Scope, and Tools of Finance

Jun 21st, 2015
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Finance is the economics of allocating resources across time.The market interest rate is the rate of exchange between present and future resources. Any transaction that a participant might make by borrowing or lending at the market interest rate of interest will produce a result that lies on the Financial Exchange Line.

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The Basic Ideas, Scope, and Tools of FinanceFinance is the economics of allocating resources across time.The market interest rate is the rate of exchange between present and future resources. Any transaction that a participant might make by borrowing or lending at the market interest rate of interest will produce a result that lies on the Financial Exchange Line. The expression that moves us up or down the exchange line is:CF(1) = CF(0) (1 + I)Present ValuePresent Value is defined as the amount of money you must invest or lend at the present time so as to end up with a paticular amount of money in the future. Present value is also an accurate representation of what the market does when it sets a price on a financial asset.The present value of all present and future resources (cash flows) is known as present wealth. It is a useful benchmark or standard to judge whether an individual will be better or worse off when undertaking a proposed financial decision.One cannot change present wealth merely bey transacting at the market rate. Borrowing and lending at this rates simply moves you up and down the exchange line--so it impacts only time allocation. (Only investing in real assets can increase present wealth. This produuces a parallel shift in the financial exchange line.) The amount of parallel shift in the exchange line can be calculated using the present value equation.PV = CF(0) + CF(1) (1 + i)Net Present ValuePV (inflow -

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