Transcript L11
L11
Intertermporal Choice II
Intertemporal Choice
periods: C1 C2
Consumption smoothing
Two
Today:
Many periods
3 Periods
Cash
flows
Many Periods
Cash
flow
0 1 2 ...
tim e
PV0
E:
T=3, r=100%. Choose:
$1 in each of the three period or $8 in the third
Translation
Cashflow
0 12
PV 0
tim e
Important cashflow: Perpetuity
Gives
constant payment x forever
Cashflow
0 12
PV 0
tim e
Perpetuity (Example)
You
can rent an apartment for $1000 each
month (r=0.5%=0.005)
PV 0
You
can buy it P=300.000
Renting
vs buying?
Quiz
Consider
consol that pays $10,000 per year.
(r=5%=0.05)
Q:
In terms of todays dollars consol is worth
A) $ 10,000
B) $100,000
C) $ 200,000
D) $1000,000
P V0
Important cashflow: Annuity
“Tree”
that gives constant payment in T
following periods
Cashflow
0 12
PV 0
T T 1
tim e
Quiz: Leasing or Buying A Car
Lease T=3, x=$800, r=100% or buy P=750
You should
A) Buy a car
B) Lease a car
C) Both options are equally attractive
Loan Payment
Take
a loan (how much do you pay monthly)
Loan=1000, T=3, r=100% and x=?
Asset Valuation: Bonds
Treasury
bill: Face, Coupon, Maturity
0 12
PV
of T-bills (F, c, T) and r
PV 0
T
Asset Valuation: Example
T-bond
(F=100, c=10, T=6) and r=5%
Life cycle problems
Consumption
– savings problem
Pension:
– How much to put aside?
– How much am I going to get?
20 21
60
80 tim e
Consumption Smoothing
Income:
100 in the first 40 years
Consumption C during 60 years,
Constant consumption! Find C if r=5%
20 21
60
80
tim e
Pension Plan
You
want C=100 when retired (61-80)
How much do you have to save if r=5%,
20 21
60
80
tim e
Pension Plan
You
save S=100 (21-60)
How much will you get (per year) if r=5%,
20 21
60
80 tim e