CHAPTER 12
FINANCIAL CONCEPTS AND MATHEMATICS
The time value of money
When people undertake to set aside money for investment something has to be given up now. For instance, if someone buys bonds in a firm or lends via commercial paper there is a sacrifice of present consumption. One of the incentives to save is the possibility of gaining a higher level of future consumption. Therefore, it is apparent that compensation is required to induce people to make a consumption sacrifice. Compensation will be required for at least three things:
- Impatience to consume. Individuals generally prefer to have £1 today than £1 in five years’ time. To put this formally: the utility of £1 now is greater than £1 received five years hence. Individuals are ...
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