Chapter 27: The Basic Tools of Finance

This chapter talks about how people decide whether or not to invest. It defines finance as the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk. This chapter introduces a way of calculating the present value, which is the amount of money today that is needed using prevailing interest rates, to produce a given future amount of money. Using the same equation, one can calculate the future value which is the amount of money in the futrue that an amount of money will yield, given prevailing interest rates. The equation is true if the account is compounding, or an accumulation of a sum of money where the interest earned remains in an account to earn additional interest. Chapter 27 also deals with how risk aversion, or the dislike of uncertainty influences people's investments. Examples include car, fire, health, and life insurance. It discusses some of the issues that insurance companies face such as adverse selection and the moral hazard.