Lecture

Principles of Finance: Annuities, Interest Rates, and Present Value

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In course

MGT-482: Principles of finance

The course provides a market-oriented framework for analyzing the major financial decisions made by firms. It provides an introduction to valuation techniques, investment decisions, asset valuation, financing decisions, and sustainable finance. ...

Description

This lecture covers the concept of annuities, including standard annuities and perpetuities, and how to calculate their present value. It also discusses the impact of interest rates on the value of cash flows over time, comparing different payment options and understanding the time value of money. The lecture further explores the relationship between nominal and real interest rates, inflation, and the term structure of interest rates, providing insights into valuing bonds and the term structure of risk-free rates.

Instructor

Erwan Morellec

ERWAN MORELLEC is Swiss Finance Institute Professor and Professor of Finance at the Ecole Polytechnique Fédérale de Lausanne (EPFL), Switzerland. He is also the Head of the SFI Léman Centre, the Head of the SFI nation-wide PhD Program, and a CEPR Research Fellow. Formerly on the faculties of the Simon School of Business of the University of Rochester (USA) and HEC Lausanne (Switzerland), he holds a Ph.D. in Finance from HEC Paris. Professor Morellec is most active in the areas of corporate finance and banking and has taught several courses on these subjects to undergraduate, MBA, and doctoral students. His recent research examines the effects of prudential regulation on banks' insolvency risk or the effects of financial market imperfections on corporate investment, financing, and risk management decisions. His research has been presented at major academic conferences and seminar series around the world and is published in top rated academic journals such as the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, and the Journal of Economic Theory. He has received several research and teaching awards.

Official source

Ontological neighbourhood

Business

Finance: Corporate finance

Related concepts (32)

Real interest rate

The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate. If, for example, an investor were able to lock in a 5% interest rate for the coming year and anticipated a 2% rise in prices, they would expect to earn a real interest rate of 3%.

Valuation using discounted cash flows

Valuation using discounted cash flows (DCF valuation) is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money. The cash flows are made up of those within the “explicit” forecast period, together with a continuing or terminal value that represents the cash flow stream after the forecast period. In several contexts, DCF valuation is referred to as the "income approach".

Interest

In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct from a fee which the borrower may pay to the lender or some third party. It is also distinct from dividend which is paid by a company to its shareholders (owners) from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs.

Interest rate parity

Interest rate parity is a no-arbitrage condition representing an equilibrium state under which investors interest rates available on bank deposits in two countries. The fact that this condition does not always hold allows for potential opportunities to earn riskless profits from covered interest arbitrage. Two assumptions central to interest rate parity are capital mobility and perfect substitutability of domestic and foreign assets.

Interest rate swap

In finance, an interest rate swap (IRS) is an interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a "linear" IRD and one of the most liquid, benchmark products. It has associations with forward rate agreements (FRAs), and with zero coupon swaps (ZCSs). In its December 2014 statistics release, the Bank for International Settlements reported that interest rate swaps were the largest component of the global OTC derivative market, representing 60%, with the notional amount outstanding in OTC interest rate swaps of