• Corporate Finance
    bond’s life if you hold it to maturity. In contrast, the rate of return can be calculated for any particular holding period and is based on the actual income and capital gain or loss on the bond for that period. When interest rates do not change, the bond price changes with time so that the...
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  • Case Study
    pay each year. This payment, which is fixed at the time the bond is issued, remains in force during the life of the bond. Interest rates have risen over the last 25 years, and that explains the rising pattern of the coupons rates. 1b. What would be the value of each bond if they had annual coupon...
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  • Analysis for Li Company (Hong Kong) Ltd
    ,” they are basically loans or “IOUs.” Interest earned on the money you lend. The prices of bonds do more up and down, but normally not as much as stocks. Many people think of bonds as conservative investments, but the returns can have a high degree of volatility. The fluctuation of interest rates is...
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  • Laguku
    , the key factors in APT can change over time. Rj = Rf + Bj1(RF1 – Rf) + … + Bjk(RFk – Rf) Where Rj = return on an asset Rf = risk-free rate of return Bj = sensitivity of an asset to a particular factor RFk = expected return on a portfolio with an average (1.0) sensitivity to a factor k j...
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  • A General Formula for Duration
    percent. The loan and the CDs pay interest annually, with principal due at maturity. a. If market interest rates increase 1 percent (100 basis points), how do the market values of the assets and liabilities of each bank change? That is, what will be the net affect on the market value of...
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  • Cash Flow
    /!Country bond) or Implied Premium Based on how equity market is priced today and a simple valuation model Aswath Damodaran! 76! Estimating the Cost of Debt     The cost of debt is the rate at which you can borrow at currently, It will reflect not only your default risk...
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  • Financial Accounting
    bond with annual or semiannual interest payments. • Explain why the market value of an outstanding fixed-rate bond will fall when interest rates rise on new bonds of equal risk, or vice versa. • Calculate the current yield, the yield to maturity, and/or the yield to call on a bond...
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  • Financial Institutions Management
    capital charge for market risk tends to underestimate interest rate risk because of (a) maturity timing differences in offsetting securities in the same time band, and (b) basis point risk for different risk assets that may not be affected in a similar manner by interest rate changes. Thus the capital...
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  • Final Exam Notes
    future, can be valuable. If you think interest rates are going down, you buy bonds because the value of the bonds will go up Maturity management – consistent cash flows Treasury notes don’t have coupon payments, they pay it all back at maturity (up to a year) If you can get 10% investing in risk...
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  • Later
    . Describe each component, and explain its role in determining expected return.   The CAPM suggests that the expected return is a function of (1) the risk-free rate of return, which is the pure time value of money, (2) the market risk premium, which is the reward for bearing systematic risk, and (3...
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  • Asde
    . insures itself against certains risks. In addition to having property and casualty insurance for its buildings, it uses global derivatives markets to protect itself against adverse currency, interest rate, and commodity price changes. By being able to manage these risks, XYZ is less likely to go into...
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  • Banking
    II capital accord. 7. Using the standardised approach, explain how a commercial bank is required to measure the operational risk component of its minimum capital adequacy requirement. 8. Why do you think small banks have a higher proportion of assets in investments than large banks? How does...
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  • Work
    accounting? How do interest rate changes affect the value of bank assets and liabilities under the two methods? What is marking to market? Book value accounting reports assets and liabilities at the original issue values. Current market values may be different from book values because they reflect...
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  • Solutions
    prior to maturity, you are exposed to the risk that the YTM may change. Suppose you purchase a 30-year Treasury bond with a 5% annual coupon, initially trading at par. In 10 years’ time, the bond’s yield to maturity has risen to 7% (EAR). a. If you sell the bond now, what internal rate of return...
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  • Essay
    possibility of default. Earlier, we discussed interest rate risk, which we defined as the risk of a change in the value of a bond resulting from a change in interest rates. Bond ratings do not address this issue. As a result, the price of a highly rated bond can still be quite volatile. Bond ratings...
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  • FINANCIAL INSTRUMENTS
    FINANCIAL INSTRUMENTS Par value is the face value of a bond. It is the principal amount that the lender (investor) is lending to the borrower (issuer). How It Works/Example: Let's assume Company XYZ issues $1,000,000 in bonds to the public. It may do so by issuing 1,000 bonds, each with a...
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  • Macroeconomics and the Financial System by N. Gregory Mankiw; Laurence Ball -- Study Guide
    expectations do not have to be correct, but that only unpredictable events will have a major influence, such as a 1 percent change, on the stock market. Note also, that the interest rate used as the discount factor in the present value formula consists of a safe interest rate and a risk premium...
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  • New Corporate Finance
    interest rates is called interest rate risk. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes. This sensitivity directly depends on two things: the time to maturity and the coupon rate. As we will see momentarily, you should keep the following in...
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  • Bondcase
    realized return. 1. How does that value compare with your expected rate of return? 2. What would have happened if interest rates had risen to 15 percent rather than fallen to 5 percent? 3. How would the results have differed if you had bought the 25- year bond rather than the 5- year bond? 4. Do these...
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  • Financial Institutions
    serve as benchmarks for other securities. 2. What are the types of risks associated with investing in bonds and how do these two risks affect the pure expectations theory? The expectations theory suggests that rates will change over time in some direction. The prospect of changing yields creates...
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