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 Annuity Discount Factor and Mortgage Payments

Why is a lottery paying \$100,000 a year for twenty years not a million dollars, and how far off is it?

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Your summary note

1. Rewriting the annuity as $C \times \text{ADF}(r,T)$
  Factor the annuity formula into $C \times \text{ADF}(r,T)$ , define the discount factor, and note that any two of present value, payment and factor give the third.
2. A mortgage as an annuity
  Write the $200,000 loan amount as the present value and the monthly payment as that amount divided by the discount factor, and record that one table covers every consumer loan.
3. The lottery winner at ten percent
  Compute the present value of $100,000 a year for 20 years, for 50 years and forever at ten percent, and record what each extension adds.
Attempt 1 of 2