October– April 2023

FN 2190 – Asset Pricing and Financial Market

LSE

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Programme Details:

Programme International Programmes -LSE

Subject Asset Pricing and Financial Markets- 2190

Subject Lecturer Ms. Shereen Al Aliwat (s.alaliwat@gmail.com)

Programme
Coordinator Ayaa

Administration Hours: 8:00 AM to 3:00 PM

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Important Notice @ VLE

You should generally use the most recent edition of any textbook, regardless of
the edition specified . If the course content makes reference to a specific page in
the textbook, please use the index of the new edition to find the relevant
section.

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 Chapter 3

Valuing long-lived cash flow streams

Essential reading Brealey, Myers and Allen (2017), Chapter 2 sections 2 and 3.

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Learning outcomes By the end of this chapter:

• use compounding and discounting techniques to value perpetuities and

annuities.

• apply valuation techniques to practical situations.

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 Perpetuities

Consider an asset that promises a fixed nominal cash flow at the end of every
period from now until the end of time. This is a perpetuity i.e. a perpetual
cash flow stream.

Example: if the discount rate is 5% and I promise to pay you $20 per year forever,
with the first payment one year from now, the present value of this promise is

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Perpetuities

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3.3 Annuities

Already Explained in Chapter 2 Slides

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3.3 Annuities

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3.3 Annuities

a follow up question. Just after you have made your tenth mortgage payment, what
is the value of your outstanding debt to the mortgage company?

After the tenth payment, you owe the mortgage provider fifteen more payments of
£54,556.48 with the first payment one year away. The total PV of these payments,
and thus the size of your outstanding mortgage debt is:

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3.4 Perpetuities with growth

Perpetuities with growth at a constant (expected) rate every period eg: inflation.

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3.4 Perpetuities with growth

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3.5 Annuities with growth

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Delayed Perpetuity:

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