Re: Why is a dollar today worth more than a dollar tomorrow?

[Marko Paunovic]

 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]

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]