FIL 240 Lecture 13 Outline of Last Lecture I Level vs Unlevel Annuities a Level annuity b Unlevel annuity II Ordinary Annuity vs Annuity Due a Ordinary Annuity b Annuity Due c Rule d Calculations III Preferred Stock a Cumulative b Debt vs Equity financing IV Perpetuity a Rule b Equation Outline of Current Lecture I Constant Growth Perpetuity a Present Value Equation b D1 Equation c Example 1 d Example 2 II Annuity a Example b Rule III Yield on Bonds a Rule 1 b Rule 2 c Call able Bonds d Yield to Call IV Liquidity Money Supply a M0 b M1 c M2 d M3 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Current Lecture Annuities Perpetuities I II III Constant Growth Perpetuity a PV D1 K g b D1 D0 1 g c Dividend of 0 2 share expected to grow at constant rate of 10 for foreseeable future If market discounts cash flows at 12 what is current price of security i D0 0 20 ii D1 0 2 1 10 0 22 iii K 0 12 iv g 0 10 v PV 0 22 0 12 0 10 11 00 share d Dividend of 0 25 share expected to grow at constant rate of 8 for foreseeable future Beta is 1 25 If expected return to market portfolio is 9 short term t bills yield 0 005 what is current price of common stock i Use capital asset pricing model if there s beta ii CAPM Ks Kf Bs Km Kf iii Ks 0 005 1 25 0 09 0 005 0 11125 iv PV D1 K g v D1 0 25 1 0 08 0 27 vi K 0 11125 vii g 0 08 viii PV 0 27 0 11125 0 08 8 64 share Annuity a Bond 3 8 2029 i Discount 3 6 ii N 15 iii I 3 6 iv PMT 38 v FV 1000 every bond has 1000 at the end b Assume semi annual payments on exam multiply x2 Yield on Bonds a 5 5 2034 currently quoted at 98 65 what is yield to maturity i N 40 ii I 2 5 61 iii PV 986 5 iv PMT 55 2 27 5 v FV 1000 b The farther a bond is from maturity the more the price will respond to a deviation between par and maturity IV c Every bond at maturity pays face value or pays 0 if the company has gone into bankruptcy d Call able Bonds the company has the right to pay off the bond early before maturity date They do this so they don t have to pay the premium e Yield to call assumes they will call in that year Liquidity Money Supply a M0 cash currency most liquid base currency b M1 M0 checking accounts traveler s checks demand deposits c M2 M1 NOW negotiable order of withdrawal credit unions accounts small time deposits CDs d M3 M2 large time deposits Euro dollars all money from other countries waiting to be exchanged
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