Suppose you want to enter into a financial contract with a reliable counterparty to receive a cash payment of $1.00 every year on December 31, for some number of years into the future. Let us assume the counterparty is a large corporation – say, Ford Motor Company – operating a successful ongoing business which generates a reliable cash flow.
What would you expect to pay up front for this annuity?
Setting a fair price for this sort of financial instrument is straightforward. Simply ...
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