ECN 506 Lecture Notes - Lecture 3: Dividend Discount Model, Risk Premium, Rational Expectations
Document Summary
Ecn 506: chapter 3: asset prices and interest rates valuing income. A financial asset yields a stream of income in the future. The owner of a bond receives a payment when the bond matures and may receive coupon payments before then. The owner of a firm"s stock receives part of the firm"s future earnings. To find the value of an asset, we must determine the value of these income streams. The key principle is that payments have different values depending on when they are received. A dollar today is worth more than a dollar in the future, because you can take today"s dollar, put it in the bank, and earn interest on it. To compare payments at different times economists begin with the concept of future value. Future value: the value of a dollar today in terms of the dollars at some future point in time.
