The document discusses the cost of money and factors that affect it. The cost of money refers to the price paid for using money, whether borrowed or owned, through interest on debt or dividends on equity. Key factors that influence the cost of money include production opportunities, time preference for consumption, risk, and inflation. Higher production opportunities and inflation increase the cost of money while higher risk demands a higher return and therefore higher cost of money. Determinants of market interest rates are the real risk-free rate, nominal risk-free rate, default risk premium, liquidity premium, and maturity risk premium.
Cost of Preference Capital Soved Problems-kpuma reur
The Preference Capital carries a cost. The Cost of Preference Capital is calculated as follows:
Preference Shares may be issued at Par, Premium, Discount.
Cost of Redeemable Preference Shares
Cost of Preference Capital Soved Problems-kpuma reur
The Preference Capital carries a cost. The Cost of Preference Capital is calculated as follows:
Preference Shares may be issued at Par, Premium, Discount.
Cost of Redeemable Preference Shares
Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best for you? Why should you care? Let's find out.
Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.
Portfolio revision, securities, New securities, existing securities, purchases and sales of securities, maximizing the return, minimizing the risk, Transaction cost, Taxes, Statutory stipulations, Intrinsic difficulty, commission and brokerage, push up transaction costs, reducing the gains, constraint, Taxes, capital gains, long-term capital, lower rate, Frequent sales, short-term capital gains, investment companies, constraints, established, objectives, skill, resources and time, substantial adjustments, mispriced, excess returns, heterogeneous expectations, better estimates, generate excess returns, market efficiency, little incentive, predetermined rules, changes in the securities market, Performance measurement, Performance evaluation, superior or inferior, small investors, better performance, prompt liquidity, comparative performance, purchase and sale of securities.
https://rb.gy/n89u77
Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Discuss the general features,
yields, prices, ratings, popular types, and international issues of
corporate bonds. Review the legal aspects of bond financing and bond cost.
Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best for you? Why should you care? Let's find out.
Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.
Portfolio revision, securities, New securities, existing securities, purchases and sales of securities, maximizing the return, minimizing the risk, Transaction cost, Taxes, Statutory stipulations, Intrinsic difficulty, commission and brokerage, push up transaction costs, reducing the gains, constraint, Taxes, capital gains, long-term capital, lower rate, Frequent sales, short-term capital gains, investment companies, constraints, established, objectives, skill, resources and time, substantial adjustments, mispriced, excess returns, heterogeneous expectations, better estimates, generate excess returns, market efficiency, little incentive, predetermined rules, changes in the securities market, Performance measurement, Performance evaluation, superior or inferior, small investors, better performance, prompt liquidity, comparative performance, purchase and sale of securities.
https://rb.gy/n89u77
Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Discuss the general features,
yields, prices, ratings, popular types, and international issues of
corporate bonds. Review the legal aspects of bond financing and bond cost.
The text provides a comprehensive overview of finance, emphasizing the importance of corporate finance and the various financial instruments used in the field. It also highlights the advantages and disadvantages of different forms of business organization and discusses the key differences between stocks and bonds in terms of risk and returns.
1Valuation ConceptsThe valuation of a financial asset is b.docxeugeniadean34240
1
Valuation Concepts
The valuation of a financial asset is based on determining the present value of future cash flows. Thus we need to know the value of future cash flows and the discount rate to be applied to the future cash flows to determine the current value.
The market-determined required rate of return, which is the discount rate, depends on the market’s perceived level of risk associated with the individual security. Also important is the idea that required rates of return are competitively determined among the many companies seeking financial capital. For example ExxonMobil, due to its low financial risk, relatively high return, and strong market position, is likely to raise debt capital at a significantly lower cost than can United Airlines, a financially troubled firm. This implies that investors are willing to accept low return for low risk, and vice versa. The market allocates capital to companies based on risk, efficiency, and expected returns—which are based to a large degree on past performance. The reward to the financial manager for efficient use of capital in the past is a lower required return for investors than that of competing companies that did not manage their financial resources as well.
Throughout this course, we apply concepts of valuation to corporate bonds, preferred stock, and common stock. For that purpose we have to be aware of the basic characteristics of each form of security as part of the valuation process. We have to consider the following:
· The valuation of a financial asset is based on the present value of future cash flows.
· The required rate of return in valuing an asset is based on the risk involved.
· Bond valuation is based on the process of determining the present value of interest payments plus the present value of the principal payment at maturity.
· Preferred stock valuation is based on the dividend paid.
· Stock valuation is based on determining the present value of the future benefits of equity ownership.
List of terms:
required rate of return
That rate of return that investors demand from an investment to compensate them for the amount of risk involved.
yield to maturity
The required rate of return on a bond issue. It is the discount rate used in present-valuing future interest payments and the principal payment at maturity. The term is used interchangeably with market rate of interest.
real rate of return
The rate of return that an investor demands for giving up the current use of his or her funds on a noninflation-adjusted basis. It is payment for forgoing current consumption. Historically, the real rate of return demanded by investors has been of the magnitude of 2 to 3 percent.
inflation premium
A premium to compensate the investor for the eroding effect of inflation on the value of the dollar.
risk-free rate of return
Rate of return on an asset that carries no risk. U.S. Treasury bills are often used to represent this measure, although longer-term government securities have al.
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2. Cost of the Money
Concept:
Cost of the money refers to the price paid for using
the money, whether borrowed or owned. Every sum
of the money used by the corporations bear the cost
of the money.
The interest paid on debt capital and the dividend
paid on ownership capital are example of cost of
money.
3. Factor Affecting cost of Money
Production Opportunities
Time preference for consumption
Risk
Inflation
4. Factor Affecting cost of Money
Production Opportunities
It is profitable option for the investment in productive
assets.
Higher the production opportunities in the economy higher
will be the cost of money and vice-versa, because the higher
opportunities have more demand of the money in the
market.
Time preference for consumption
5. Factor Affecting cost of Money
Risk
Risk is an uncertain outcome or chance of an adverse outcome.
Financially Risk is the chance of the investment wouldn’t produced
the required rate of return.
Higher the risk in the investment demands the higher return and
there by higher the cost of money supplied to the investment and
vice versa. Hence the cost of money affected by the risk.
Inflation
6. Determinants of Market Interest Rates
The Real Risk-free rate of Interest.
The Nominal Risk-free Rate of Interest
Default risk Premium
Liquidity Premium
Maturity Risk Premium
7. Determinants of Market Interest Rates
The Real Risk-free rate of Interest(k*).
The interest rate resulting from the risk-free financial assets in the
economy which is free from the inflation.
For eg: Interest rate on Government Treasury Bill and Treasury
bond, Treasury bill has a maturity of 90 days and no inflation. But
Treasury bond is long term security.
It is denoted by k*.
The Nominal Risk-free Rate of Interest(krf)
It is the real risk-free rate of interest(k*) plus premium for the
inflation (IP).
If there is inflation the investor demands the risk-free rate and
premium for the inflation for the invested fund.
It is denoted as krf =k* + IP
8. Determinants of Market Interest Rates
Default risk Premium(DRP)
Default risk is the chance of not getting back the amount of fund
that is invested to the securities.
It is the premium for risk of default of principal and interest
payment.
Higher the uncertainty of timely payment of interest and principal,
higher will be the Default Risk Premium and vice-versa.
So DRP is the determinant of interest rate.
9. Determinants of Market Interest Rates
Liquidity Premium(LP)
Liquidity refers to the marketability and convertibility of securities
in the cash.
It is the premium for lower marketability and convertibility of
securities.
Investors want to invest in the securities having higher liquidity,
because that security can be traded quickly. Like government
securities and securities of the reputed and established
corporations.
If the security is not liquid, the investors demand the premium for
the liquidity risk of the security.
Hence the market interest is higher for the securities having lower
liquidity.
10. Determinants of Market Interest Rates
Maturity Risk Premium(MRP)
Maturity is the time of security to be refunded to the investor.
The maturity risk premium reflected by price risk on longer term
maturity bond.
MRP is the premium for the longer maturity of the securities.
So longer the maturity period, higher will be the risk premium and
thereby higher will be the market interest rate expected by
investors.
Putting all factors together, the market interest rate (okn) be:
)Kn = k*+ IP + DRP + LP + MRP