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∞

Reading the Rate Off a Perpetuity's Price

How can a bond whose price never moves still earn its holder exactly the market rate of interest?

Loading…

←Previous The Perpetuity: Why Cash Forever Is Worth C/r Next The Growing Perpetuity, and When Growth Outruns r →

Your summary note

1. Inverting $P = \frac{C}{r}$ to get the rate
  Record that the market fixes the price at auction, rearrange $P = \frac{C}{r}$ into $r = \frac{C}{P}$ , and work the case of $100 a year priced at $500.
2. British consols and Disney's 100-year bonds
  Note the consol as an undated gilt redeemed at par in 2015 and Disney's 1993 bonds due 2093, where 100 terms come close to the infinite series.
3. Auction design and imperfect market pricing
  Record that the winning bidder is the most confident participant, that market pricing makes mistakes, and that a design where the winner pays the second-highest bid elicits true valuations.
4. Price return versus total return
  Contrast the unchanged price when $C$ and $r$ both hold fixed with the $100 coupon on a $1,000 price, and state what a change in rates does to the price.
Attempt 1 of 2