Capital, Interest, and Corporate Finance

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Capital, Interest, and Corporate Finance
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Consumption and Production

• Production cannot occur without savings.
• Roundabout Production- the need to acquire
  additional resources before production can occur.
• Sometime you need time
• Sometime you need skills

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Consumers Prefer

• To consume now rather than in the future
• To get them to wait you must pay them for the
  privilege of using their money that is the
  interest rate.
• Interest Rate- the amount paid to savers to allow
  others to produce

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Producers need

• To produce now.
• They will continue to borrow so long as the
  marginal return on an investment (their borrowed
  money) exceeds the cost of their investment
  (interest rate)
• Or
• Will produce so long as the marginal revenue
  produce exceeds the marginal resource cost

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Exhibit 1 Marginal Rate of Return on Investment
in Farm Equipment
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Loanable Funds Market

• Where wavers and borrowers come together to
  determine the market rate for funds
• Supply of Loanable Funds
• Demand for Loanable Funds

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Exhibit 2 Market for Loanable Funds
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Why Interest Rates Differ

• Risk of repayment
• Higher the risk, higher the rate
• No matter what the risk, there is always a rate
• Duration of the loan
• Costs of administration of the loan
• Different Loans have different tax effects.