This is “The Interest of Interest”, section 4.1 from the book Finance, Banking, and Money (v. 1.0).
This book is licensed under a Creative Commons by-nc-sa 3.0 license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms.
This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book.
Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page.
For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (8 MB) or just this chapter (443 KB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).
InterestThe opportunity cost of money., the opportunity cost of money, is far from mysterious, but it warrants our careful consideration because of its importance. Interest ratesThe price of borrowed money., the price of borrowing money, are crucial determinants of the prices of assets, especially financial instruments like stocks and bonds, and general macroeconomic conditions, including economic growthReal per capita GDP.. In fact, ceteris paribusAll else equal. (like your grades!) the probability of you landing a job upon graduation will depend in large part on prevailing interest rates. If rates are low, businesses will be more likely to borrow money, expand production, and hire you. If rates are high, businesses will be less likely to expand or to hire you. Without a job, you’ll be forced to move back home. Best to pay attention then!
Interest can be thought of as the payment it takes to induce a lender to part with his, her, or its money for some period of time, be it a day, week, month, year, decade, or century. To make comparisons between those payments easier, interest is almost always expressed as an annual percentage rate, the number of dollars (or other currency)http://fx.sauder.ubc.ca/currency_table.html paid for the use of $100 per year. Several ways of measuring interest rates exist, but here you’ll learn only yield to maturityThe most economically accurate way of measuring interest rates., the method preferred by economists for its accuracy. The key is to learn to compare the value of money today, called present valueThe value of money today. (represented here by the variable PV and aka present discounted value or price), to the value of money tomorrow, called future valueThe value of money at some point in the future. (represented here by the variable FV).