Class 8 and 9 Before

# C preferred stock is often treated and valued as a

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C Preferred Stock is often treated (and valued) as a perpetuity. 10

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Perpetuity Example C You want to endow an annual graduation party at your university. You would like to budget \$50,000 per year in perpetuity. If the university earns 5% on its investments and the first party is going to be one year from now, how much money will you have to donate today? 11
12 Perpetuity Due C What is the present value of an infinite stream of cash flows ‘A’ that are made at the beginning of each period (i.e. they start immediately)?

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13 Perpetuity vs. Long Annuity C Consider a perpetuity that pays \$1,000 at the end of each period forever. When r = 10%, the PV of this perpetuity is equal to C Compare this to the present value of a 99-year annuity of \$1,000 per year (first payment at the end of the year). For r = 10%, the present value is equal to
14 Canadian Mortgages C A typical mortgage in Canada is a closed 5-year fixed rate mortgage with an amortization period of 25 years. C Mortgage payments are typically monthly, so there are 300 payments. C Canadian financial regulations require mortgage rates to be quoted with semi-annual compounding.

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15 Canadian Mortgages Continued C Explanation of terms: Open vs. Closed Mortgage: Mortgage Term: Period over which payments are fixed. Amortization Period: Period over which mortgage is (assumed) to be paid off.
16 Mortgage Example (1) C Suppose you want to buy a condo. You need to borrow \$500,000 to pay for the condo.

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