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Understanding Interest Rates and Bond Prices: Present and Future Value Analysis

This chapter explores the relationship between interest rates and bond prices, highlighting crucial concepts like future value and present value of money. It delves into how $1,000 today can grow to $1,060 through compounding and examines the impact of discounting on the present value of future cash flows. Additionally, it discusses the supply and demand for loanable funds, illustrating shifts in these dynamics and their influence on interest rates. Useful for finance students and professionals seeking to understand fundamental financial principles.

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Understanding Interest Rates and Bond Prices: Present and Future Value Analysis

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  1. CHAPTER 7 Interest Rates and Bond Prices

  2. Payment Today $1,000 Future Value 1,060 Compounding: The Future Value of Money Lent Today

  3. Value Today $1,000 Future Payment 1,060 Discounting: The Present Value of Money to Be Received in the Future

  4. Supply Interest Rate (Percent) 6 E1 Demand $500 Loanable Funds (in Billions) The Supply of and Demand for Funds

  5. A Shift in the Demand for Funds Interest Rate (Percent) SS 8 E2 6 E1 D'D' DD $500 $600 Loanable Funds (in Billions)

  6. SS Interest Rate (Percent) S'S' 6 E1 4 E2 DD $500 $550 Loanable Funds (in Billions) A Shift in the Supply of Funds

  7. Inflation and Interest Rates: A Graphical Treatment Interest Rate (Percent) S’S’ SS 10 E2 6 E1 DD D'D' $500 Loanable Funds (in Billions)

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