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∞

01Leverage: How a 10% Fall Becomes a 200% Loss 02Who Absorbs the Loss: Walking Away, Rate Cuts, Bailouts 03Last in Line: Chapter 11 and How Lehman's Equity Hit Zero 04Inflation vs. Time Value: Wealth and the Price Index 05Real Returns: Match the Discount Rate to the Cashflow Problem set0/10 Problem set 20/10 MIT problem set0/7 Practice∞

Leverage: How a 10% Fall Becomes a 200% Loss

How can a 10% fall in a house price cost you 200% of the money you actually put in?

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Your summary note

1. Lehman Brothers' 16-to-1 net leverage at end-2007
  Record the end-2007 figures — $19 billion net revenues, $4 billion net income, $145 billion long-term capital, 28,500 employees — next to the 16:1 net leverage ratio and the nine-month collapse.
2. Leverage as assets over equity, not debt over equity
  Write the definition and compute both ratios for a $500,000 house: $100,000 down gives 5:1 and $25,000 down gives 20:1, recording the contrast with debt over equity.
3. The lender's fixed claim and the equity holder's loss
  State that the lender is owed its principal plus interest whatever the house is worth, then carry the $50,000 loss from a 10% fall through to -50% at 5:1 and -200% at 20:1.
4. Contained volatility as the condition for safe leverage
  Record that leverage is symmetric on the upside and that 20:1 held while housing rose 5-10% a year in an orderly way, and note what the pre-2008 rise in volatility did to it.
Attempt 1 of 2