Lecture3 - Perpetuities and Annuities In this chapter we...

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Unformatted text preview: Perpetuities and Annuities In this chapter, we maintain the assumptions of the previous chapter: • We assume perfect markets , so we assume four market features: 1. No differences in opinion. 2. No taxes. 3. No transaction costs. 4. No big sellers/buyers. Important: You need your calculator! Scan Chp. 3 and lecture notes before class. 07/11/11 23:23 References Corporate Finance: An Introduction (Welch, 2009, Prentice Hall) Chapter 3 2 Simple Perpetuities - Definition A perpetuity is a financial instrument that pays C dollars per period, forever. The perpetuity does not stop for any reason. Typically (but not always) the first payment from the perpetuity arrives in period 1 (not today, period 0!). When solving problems, make sure that you know when the first cash flow arrives, and adjust the formula accordingly. 3-1.A 3 Simple Perpetuities - Formula The PV of the perpetuity is: Just trust me that the terms to the left and right of the = sign are the same. Memorize the formula to the right of the = sign! The weird symbol in the first term is a summation sign. It is very common in finance, but is basically addition. For each period t from 1 to infinity, you add the term C/(1+r)^t. So, the first terms of the summation are: C/(1+r) + C/(1+r)^2 + C/(1+r)^3 + C/(1+r)^4 .... 3-1.A r C = + ∑ ∞ = 1 t t r) (1 C 4 Q2: What is the value of a promise to receive $10 forever, beginning next year, if the interest rate is 5% per year?...
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This document was uploaded on 11/04/2011 for the course FINANCE 0901 at Brown College.

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Lecture3 - Perpetuities and Annuities In this chapter we...

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