ECON 251 - Lecture 10 - Dynamic Present Value
Lecture 10 - Dynamic Present Value
In this lecture we move from present values to dynamic present values. If interest rates evolve along the forward curve, then the present value of the remaining cash flows of any instrument will evolve in a predictable trajectory. The fastest way to compute these is by backward induction. Dynamic present values help us understand the returns of various trading strategies, and how marking-to-market can prevent some subtle abuses of the system. They explain how mortgages work, why they're called amortizing, and what is meant by the remaining balance. In the second half of the lecture we turn to an important application of present value thinking: an analysis of the troubles facing the Social Security system.
Ross, Corporate Finance, chapters 5 and 6
Sharpe, Investments, pp. 340-440
Bodie, Finance, pp. 212-232
Taggart, Quantitative Analysis for Investment Management, pp. 17-25