Unit Four: Money (Part Two)

Money

Notes from 3/9/16

QUESTION: Is a dollar today worth more than a dollar tomorrow?

ANSWER: YES

WHY: Inflation and Opportunity Cost

VARIABLES:

v= future value of money

p= present value of money

r= real interest rate (nominal interest rate - inflation, expressed as a decimal)

n= years

k= # of times interest is credited per year

Simple Interest Formula

v= (1 + r) ^n x p

Compound Interest Formula

v= (1 + r/k)^nk x p

Example: Inflation is expected to be at 3% and nominal interest rate on simple interest savings is 1%. Calculate the future value of $ after one year.

r%= i% - ∏%

r%= 1 - 3 

r%= -2% or -0.02

v= (1 + r)^n x p

v= (1 + -0.02)^1 x 1

v= (.98)^1 x 1

v= $0.98

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