This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
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. 31.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 .... 31.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?...
View
Full
Document
This document was uploaded on 11/04/2011 for the course FINANCE 0901 at Brown College.
 Summer '11
 TomislavLadika

Click to edit the document details