Re: Why is a dollar today worth more than a dollar tomorrow?
In order for the government to borrow money, they would need to provide an incentive for the savers to lend. Example, if you want to borrow from me what incentive would I have to lending you my money? --- john hull [EMAIL PROTECTED] wrote: For some reason, I can't get it straight in my head why the risk-free rate of interest would be higher than zero. Does it really come from the fact that some people wish to consume today but can't, so they purchase current consumption from suppliers, i.e. lenders, and the interest rate is just the price in that particular market? Or is there something different, or deeper, or whatever going on? __ Do you Yahoo!? Free Pop-Up Blocker - Get it now http://companion.yahoo.com/ __ Do you Yahoo!? Free Pop-Up Blocker - Get it now http://companion.yahoo.com/
Re: Why is a dollar today worth more than a dollar tomorrow?
On 2003-12-05, john hull uttered: For some reason, I can't get it straight in my head why the risk-free rate of interest would be higher than zero. The easiest example I know of is, would you be happy saving all of your income for the next year, without receiving a formidable compensation? That'd kill you, after all, because eating is consumption. This shows us that people have at least some urgent desires which aren't interchangeable with longer term ones. -- Sampo Syreeni, aka decoy - mailto:[EMAIL PROTECTED], tel:+358-50-5756111 student/math+cs/helsinki university, http://www.iki.fi/~decoy/front openpgp: 050985C2/025E D175 ABE5 027C 9494 EEB0 E090 8BA9 0509 85C2
Re: Why is a dollar today worth more than a dollar tomorrow?
On 2003-12-05, john hull uttered: For some reason, I can't get it straight in my head why the risk-free rate of interest would be higher than zero. The easiest example I know of is, would you be happy saving all of your income for the next year, without receiving a formidable compensation? Sampo Syreeni, aka decoy - mailto:[EMAIL PROTECTED], tel:+358-50-5756111 That does not explain it, because many folks would save SOME of their income even if the interest rate were zero. Fred Foldvary = [EMAIL PROTECTED]
Re: Why is a dollar today worth more than a dollar tomorrow?
Let's see first what the risk-free interest rate really is. It depends on two conditions. One condition is that the borrower will certainly repay the money. The other condition is that the lender will certainly be alive to collect it when the time comes. That is probably the strongest reason why we prefer current consumption. We are just not sure whether we will be alive tomorrow. For the sake of argument, let's assume that people can't die. As I see it, money still has many uses. One of them is investing in a factory. So, I could build a factory and make some profit. In a risk-free world I can't fail. I might make small profit, but as long as it is positive, I am not willing to lend the money to somebody else for free. - Original Message - From: john hull [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Friday, December 05, 2003 16:29 PM Subject: Why is a dollar today worth more than a dollar tomorrow? For some reason, I can't get it straight in my head why the risk-free rate of interest would be higher than zero. Does it really come from the fact that some people wish to consume today but can't, so they purchase current consumption from suppliers, i.e. lenders, and the interest rate is just the price in that particular market? Or is there something different, or deeper, or whatever going on? __ Do you Yahoo!? Free Pop-Up Blocker - Get it now http://companion.yahoo.com/
Re: Why is a dollar today worth more than a dollar tomorrow?
--- Marko Paunovic [EMAIL PROTECTED] wrote: In a risk-free world I can't fail. Risk-free interest is quite different from a risk-free world. We need to assume the usual risky world, but a loan that is sure to be repaid and with the interest sure to be paid, which US treasury bonds currently come close to. Fred Foldvary = [EMAIL PROTECTED]
Re: Why is a dollar today worth more than a dollar tomorrow?
OK. Then, as long as the expected profit from building a factory is higher than zero, I would not lend the money at zero interest rate. Maybe to make a point more clear. As long as there is some opportunity for me to invest in a project with positive expected profits (whatever it is - building a factory, running a restaurant...) I would not lend the money at zero interest rate. And not just that. If I am really good at what I do, I would probably need some extra cash so I would be willing to pay someone to lend me that cash. As long as people are reasonably risk-averse, they will prefer giving money to me and risking it than giving it to someone else for free with no risk. So, if you assume that there is only one way of lending the money risk-free, while other ways are risky, there will always be someone who is willing to take that risk and be compensated for it. But then, it looks like a real world... That is why I assumed we live in a risk-free world. I guess the short answer to the question Why is a dollar today worth more than a dollar tomorrow? is Because there are some people who know how to take $1 today, transform it in $2 tomorrow and pay up to $1 for that. Marko - Original Message - From: Fred Foldvary [EMAIL PROTECTED] To: Marko Paunovic [EMAIL PROTECTED]; [EMAIL PROTECTED] Sent: Friday, December 05, 2003 21:58 PM Subject: Re: Why is a dollar today worth more than a dollar tomorrow? --- Marko Paunovic [EMAIL PROTECTED] wrote: In a risk-free world I can't fail. Risk-free interest is quite different from a risk-free world. We need to assume the usual risky world, but a loan that is sure to be repaid and with the interest sure to be paid, which US treasury bonds currently come close to. Fred Foldvary = [EMAIL PROTECTED]
