Foundations of Finance

01Defining Finance and the Financial System 02Valuation and Management: The Two Challenges 03Stocks, Flows, and the Five Cash-Flow Decisions 04Time, Risk, and the Six Principles of Finance 05How to Learn Finance: Practice and Study Habits Problem set0/10 Problem set 20/10 Practice∞

Present Value

01Information and Price: An Auction and Fannie Mae 02Who Pays for the Fannie and Freddie Guarantee?03What Counts as an Asset: Patents, Secrets, Brands 04An Asset as a Sequence of Dated Cashflows 05The Value Operator and the Cashflow Timeline 06Dates as Currencies: Building Net Present Value 07Discount Factors: Market Prices for Future Dollars 08A Worked Net Present Value and Its Assumptions 09The Opportunity Cost of Capital and Present Value Problem set0/10 Problem set 20/10 MIT problem set0/5 Practice∞

01Does the Currency Change an NPV's Sign?02Moral Hazard and Contagion: Where Bailouts Stop 03The NPV Rule at Work, and Choosing the Rate 04The Perpetuity: Why Cash Forever Is Worth C/r 05Reading the Rate Off a Perpetuity's Price 06The Growing Perpetuity, and When Growth Outruns r 07Building the Annuity from Two Perpetuities 08The Annuity Discount Factor and Mortgage Payments 09APR, the Effective Annual Rate, and Compounding Problem set0/10 Problem set 20/10 MIT problem set0/13 Practice∞

The Opportunity Cost of Capital and Present Value

How does one number r replace an entire table of exchange rates and yield the present value formula behind capital budgeting?

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Your summary note

1. Future values of a dollar, $(1+r)^T$
  Record the force beneath impatience and inflation, write what a dollar today becomes in Years 1, 2 and $T$ , and set $(1+r)^2$ against a single two-year factor $1+z$ .
2. One rate $r$ in place of many exchange rates
  List the names $r$ goes by, count the exchange rates needed without it across every pair of dates, and record the euro comparison and the market as the source of $r$ .
3. Discount factors in terms of $r$ : $1/(1+r)^T$
  Write the discount factors for Years 1, 2 and $T$ , then work both self-tests: $100 at $7\%$ carried three years forward, and $180 in Year 3 valued at Year 1 at $8\%$ .
4. The explicit present value operator in $r$
  Assemble $V_0 = \text{CF}_0 + \frac{\text{CF}_1}{1+r} + \frac{\text{CF}_2}{(1+r)^2} + \cdots$ from the exchange-rate form, and record what it can value and which parts of finance reduce to it.
Attempt 1 of 2