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ECON 251: Financial Theory

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. (from oyc.yale.edu)

Lecture 10 - Dynamic Present Value

Time Lecture Chapters
[00:00:00] 1. Dynamic Present Values
[00:08:49] 2. Marking to Market
[00:39:53] 3. Mortgages and Backward Induction
[00:50:42] 4. Remaining Balances and Amortization
[00:54:52] 5. Weaknesses in the U.S. Social Security System

References
Lecture 10 - Dynamic Present Value
Instructor: Professor John Geanakoplos. Transcript [html]. Audio [mp3]. Download Video [mov].

Go to the Course Home or watch other lectures:

Lecture 01 - Why Finance?
Lecture 02 - Utilities, Endowments, and Equilibrium
Lecture 03 - Computing Equilibrium
Lecture 04 - Efficiency, Assets, and Time
Lecture 05 - Present Value Prices and the Real Rate of Interest
Lecture 06 - Irving Fisher's Impatience Theory of Interest
Lecture 07 - Shakespeare's Merchant of Venice and Collateral, Present Value and the Vocabulary of Finance
Lecture 08 - How a Long-Lived Institution Figures an Annual Budget; Yield
Lecture 09 - Yield Curve Arbitrage
Lecture 10 - Dynamic Present Value
Lecture 11 - Social Security
Lecture 12 - Overlapping Generations Models of the Economy
Lecture 13 - Demography and Asset Pricing: Will the Stock Market Decline when the Baby Boomers Retire?
Lecture 14 - Quantifying Uncertainty and Risk
Lecture 15 - Uncertainty and the Rational Expectations Hypothesis
Lecture 16 - Backward Induction and Optimal Stopping Times
Lecture 17 - Callable Bonds and the Mortgage Prepayment Option
Lecture 18 - Modeling Mortgage Prepayments and Valuing Mortgages
Lecture 19 - History of the Mortgage Market: A Personal Narrative
Lecture 20 - Dynamic Hedging
Lecture 21 - Dynamic Hedging and Average Life
Lecture 22 - Risk Aversion and the Capital Asset Pricing Theorem
Lecture 23 - The Mutual Fund Theorem and Covariance Pricing Theorems
Lecture 24 - Risk, Return, and Social Security
Lecture 25 - The Leverage Cycle and the Subprime Mortgage Crisis
Lecture 26 - The Leverage Cycle and Crashes