Showing posts from September, 2017

Discount Rate, Yield to Maturity, Value of the Share, E/P Ratio and Ke

Discount Rate: - It is the rate of return that investors expect from securities of comparable risk.
Bonds or Debentures: - Theseare debt instruments or securities. In case of abond/debenture the stream of cash flows consists of annual interest payments and repayment of principal. These flows are fixed and known.
The Value of the Bond: - Itcan be found by capitalising cash flows at a rate of return, which reflects their risk. The market interest rate or yield is used as the discount rate in case of bonds (or debentures). The basic formula for the bond value is as follows:

Yield to Maturity: - A bond’s yield to maturity or internal rate of return can be found by equating the present value of the bond’s cash outflows with its price in the above equation.
Zero-Interest Bonds (called zero-coupon bonds in USA) do not have explicit rate of interest. They are issued for a discounted price; their issue price is much less than the face value. Therefore, they are also called deep-discount bonds. The …

Time Value For Money, Risk Premimum, Interest Rate, Capital Recovery

Time Value for Money : - Individual investors generally prefer possession of a given amount of cash now, rather than the same amount at some future time. This time preference for money may arise because of (a) uncertainty of cash flows, (b) subjective preference for consumption, and (c) availability of investment opportunities. The last reason is the most sensible justification for the time value of money.
Risk Premium: - Interest rate demanded, over and above the risk-free rate as compensation for time, to account for the uncertainty of cash flows.
Interest Rate or Time Preference Rate: - Rate which gives money its value, and facilitates the comparison of cash flows occurring at different time periods.
Required Interest Rate: - A risk-premium rate is added to the risk- free time preference rate to derive required interest rate from risky investments.
Compounding: - It means calculating future values of cash flows at a given interest rate at the end of a given period of time.
Future Value (F) …