10. Dynamic Present Value

Financial Theory (ECON 251)

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.

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

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses

This course was recorded in Fall 2009.