Finance over all ppt @ mba finance
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The document discusses several key concepts in finance including: 1) Finance involves allocating resources across time through borrowing, lending, and investing. Markets provide information to compare returns and risks of different investments. 2) Interest rates reflect the exchange between present and future resources, with higher rates translating to a steeper slope and greater future resources needed to exchange for present amounts. 3) Net present value, internal rate of return, and other concepts are used to evaluate investments based on discounted cash flows.
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The document discusses the time value of money concept. It states that time value of money refers to money being worth more the earlier it is received. It also discusses key concepts like present value, future value, compounding, discounting, and how to calculate future and present values using formulas that factor in variables like interest rates and time periods. The document also mentions how risk and inflation impact interest rates in determining the cost of capital.
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Management of funds is a critical aspect of financial management. Management of funds acts as the foremost concern whether it is in a business undertaking or in an educational institution. Financial management, which is simply meant dealing with management of money matters.
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Risk associated with Foreign Exchange
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Time value of money 1
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1Valuation ConceptsThe valuation of a financial asset is b.docx
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.
International Banking and Foreign Exchange risk
This document discusses hedging instruments for managing foreign exchange risk. It begins by defining foreign exchange exposure and classifying it into three categories: transaction exposure, translation exposure, and economic exposure. The document then discusses techniques for managing exposure, including forwards, futures, options, swaps, and combinations of these derivatives. It provides details on forwards contracts, interest rate swaps, currency swaps, and how premiums and discounts are calculated for forwards. The purpose is to explain common hedging instruments used to reduce foreign exchange risk.
Security Analysis & Portfolio Management
This presentation discusses bond valuation. It defines bonds and bond valuation, which includes calculating the present value of future interest payments and the bond's value at maturity. It then discusses various ways to calculate bond returns, such as coupon rate, current yield, spot interest rate, and yield to maturity. It also defines bond price as the present value of expected cash flows. The presentation concludes by discussing bond risks, including default and interest rate risk, as well as bond duration and several bond pricing theorems.
Bond Valuation
This presentation discusses bond valuation. It defines bonds and bond valuation, which includes calculating the present value of future interest payments and the bond's value at maturity. It then discusses various ways to calculate bond returns, including coupon rate, current yield, spot interest rate, and yield to maturity. It also covers bond price valuation, bond risks, bond duration, and five principles of bond pricing theorems.
Similar to Finance over all ppt @ mba finance (20)
Chapter 03_What Do Interest Rates Mean and What Is Their Role in Valuation?
Chapter 03_What Do Interest Rates Mean and What Is Their Role in Valuation?
1Valuation ConceptsThe valuation of a financial asset is b.docx
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Editor's Notes
- Course summary by Kim Stephens, class of 2006 [email_address]