l11 intertermporal choice ii. intertemporal choice u two periods: u consumption smoothing u today:...
TRANSCRIPT
L11
Intertermporal Choice II
Intertemporal Choice
Two periods: Consumption smoothing
Today: Many periods
1C 2C
3 Periods Cashflows
Many Periods Cashflow
E: T=3, r=100%. Choose:$1 in each of the three period or $8 in the third
0 1 2 . . . time
0PV
Translation Cashflow
0 1 2 . . . time
0PV
Gives constant payment x forever Cashflow
Important cashflow: Perpetuity
0PV
0 1 2 . . . time
You can rent an apartment for $1000 each month (r=0.5%=0.005)
You can buy it P=300.000 Renting vs buying?
Perpetuity (Example)
0PV
Valuate a consol that pays $10,000 per year. (r=5%=0.05)
You inherit $1000,000. How much monthly interest are you going to get ? (r=5%=0.05)
Perpetuity (Example)
0PV
“Tree” that gives constant payment in T following periods
Cashflow
Important cashflow: Annuity
0PV
0 1 2 . . . timeT 1T
Leasing or buying a car?
Lease T=3, x=$800, r=100% or buy P=750
Take a loan (how much do you pay monthly)
Loan=1000, T=3, r=100% and x=?
Leasing or Buying A Car
Treasury bill: Face, Coupon, Maturity
PV of T-bills (F, c, T) and r
Asset Valuation: Bonds
0PV
0 1 2 . . . T
T-bond (F=100, c=10, T=6) and r=5%
Asset Valuation: Example
Consumption – savings problem Pension:
–How much to put aside?
–How much am I going to get?
Life cycle problems
20 21 . . . time60 80
Income: 100 in the first 40 years Consumption C during 60 years, Constant consumption! Find C if r=5%
Consumption Smoothing
20 21 . . . time60 80
You want C=100 when retired (61-80) How much do you have to save if r=5%,
Pension Plan
20 21 . . . time60 80
You save S=100 (21-60) How much will you get (per year) if r=5%,
Pension Plan
20 21 . . . time60 80