Moving Cash Flows: Review Formulas Growing Annuity Annuities are a constant cash flow over time Growing annuities are a constant growth cash flow over.

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Presentation transcript:

Moving Cash Flows: Review

Formulas

Growing Annuity Annuities are a constant cash flow over time Growing annuities are a constant growth cash flow over time

What are you worth today? You will make $100,000 the first year. You expect to work for 40 years, get 9% raises every year and 20% per year on investments.

Cash Flow Timing When does the first cash flow occur relative to the present value of the _______ –Perpetuity? Growing perpetuity? –Annuity? Growing annuity? One period later!

Review: Bond Features Coupon Payments: Regular interest payments –Semi annual for most US corporate bonds –Types of Coupon payments Fixed Rate: 8% per year Floating Rate: 6-mo. Treasury bill rate basis points. Face or Par Value: $1,000/bond Maturity: no. of years from issue date until principal is paid Coupon Rate

Bond Valuation Annuity Formula

What is the price of a $1000 bond maturing in ten years with a 12% coupon that is paid semiannually if the YTM is 10%