Perpetuities and Annuities - Corporate Finance - Ivo Welch
Perpetuities and Annuities - Corporate Finance - Ivo Welch Perpetuities and Annuities - Corporate Finance - Ivo Welch
What is the value of a 3-decade annuity $100 million each decade, with a decadal (10-year) interest rate of 50%, via the plain NPV formula and via the annuities formula. The first payment occurs in 10 years. 26/1
Annuity Example: Mortgage Loan Here is a summary of how mortgage payments are usually calculated: A 30-year mortgage is an annuity with 360 monthly payments, starting one month from today. Because payments are monthly, we need the monthly interest rate. The monthly rate on a mortgage is always computed as the quoted rate divided by 12. (In other words, like bank interest, your actual annual interest rate on a mortgage is higher than quoted. Lovely, isn’t it?) So the monthly interest rate on a 9% mortgage is r monthly = 0.09/12 = 0.0075 per month 27/1
- Page 1 and 2: Perpetuities and Annuities (Welch,
- Page 3 and 4: General Questions ◮ Are there any
- Page 5 and 6: Simple Perpetuities A perpetuity is
- Page 7 and 8: ...in another language ◮ If you k
- Page 9 and 10: What is the value of a promise to r
- Page 11 and 12: What is the perpetuity formula if t
- Page 13 and 14: Growing Perpetuities A growing perp
- Page 15 and 16: How can a growing infinite sum be l
- Page 17 and 18: What is the value of a firm that ju
- Page 19 and 20: In 10 years, a firm will have annua
- Page 21 and 22: What should be the share price of a
- Page 23 and 24: The Gordon Dividend Growth Model
- Page 25: Annuities An annuity is a financial
- Page 29 and 30: Omitted: Principal and Interest Dec
- Page 31 and 32: What is the PV (or cost) of project
- Page 33 and 34: What if you need to use the buildin
- Page 35 and 36: Why is this EAC stuff in the annuit
- Page 37 and 38: What are the payments to a 5% semi-
- Page 39 and 40: Is the coupon rate of a bond equal
- Page 41 and 42: An insurance company offers a retir
- Page 43 and 44: The prevailing interest rate is 10%
- Page 45 and 46: Assume that our firm has stopped gr
- Page 47 and 48: An example drawn from an actual aut
- Page 49 and 50: If you took out a loan from the ban
- Page 51 and 52: Should you use perpetuities? How lo
- Page 53: Omitted, but in the book ◮ Proof
What is the value of a 3-decade annuity $100 million each<br />
decade, with a decadal (10-year) interest rate of 50%, via<br />
the plain NPV formula <strong>and</strong> via the annuities formula. The<br />
first payment occurs in 10 years.<br />
26/1
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