11-15 lecture notes

11-15 lecture notes - i.e life insurance or mortgage •...

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Year CF PVIF PV 1 $10,000 1/(1+.1)^1 $9,090.90 2 $20,000 1/(1+.1)^2 16,528.93 3 $10,000 1/(1+.1)^3 7,513.15 Total present value is $33,132.98 and therefore, anything higher than that should not be invested if you will receive $40,000 CF is the cash flow, money that you will receive down the line If PV of CF > cost, accept If PV of CF < cost, reject When cash flows are constant this is called annuity Annuity is a contract in which you have to pay the same cost period after period
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Unformatted text preview: i.e. life insurance or mortgage • PVA= PMTxPVIFA • PVIFA= (1-1/(1+i)^n)/i • PMT= payment • Interest up, price of bond down…interest down, price of bond up • Higher interest rates lead to capital losses to a lot of people which leads to recession • As interest increases investment decreases and when interest declines investment increases...
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