Helping Students Crack Annuity, Perpetuity, Bond, and Stock Valuation Formulas

Abstract

Mainstream finance textbooks present valuation formulas of annuities, perpetuities, stocks, and bonds, but the texts seldom explain the story behind them, leaving students in the dark about why these formulas work. The aim of this paper is to illuminate the black box of these formulas, thus helping finance instructors and students truly understand them. Starting from the basic valuation principle, we can reach each of these seemingly daunting formulas via a few simple algebraic steps. When students reach their “Ah-ha” moment at the end of each derivation, it motivates them and subsequently boosts their interest and confidence in learning Finance.

Keywords: Annuity, Perpetuity, Stock Valuation, Bond Valuation, Finance Teaching

JEL Classification: A22, G00