Learning Objectives Valuing Income Streams Future

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Learning Objectives

Valuing Income Streams

Future Value

Present Value

A Series of Payments

Present Value: An Example

Payments Forever

Another Perpetuity

The Classical Theory of Asset Prices

Bond Prices

Stock Prices

Expectations

Risk-free and Risky Interest Rates

The Classical Theory of Asset Prices

The Gordon Growth Model of Stock Prices

Fluctuations in Asset Prices

Case Study: The Fed and the Stock Market

3. 1 The Fed and the Stock Market When the Fed raises interest rates unexpectedly, a series of effects reduces stock prices. When the Fed lowers rates unexpectedly, opposite effects occur and stock prices rise.

Which Asset Prices Are Most Volatile?

Bond Prices, Maturity, and Interest Rates

Which Asset Prices Are Most Volatile?

Asset-Price Bubbles

The House Price Bubble

Case Study: Tulipmania

Looking for Bubbles

3. 2 Evidence for Bubbles? Each point in this graph represents a year between 1918 and 2000. The horizontal axis is the price -earnings ratio for stocks in the S&P 500, based on average earnings over the previous 10 years. The vertical axis is the average percentage change in S&P prices over the following 10 years, adjusted for inflation. (The 10 -year change after 2000 is estimated with data through 2009).