3 Factors that Influence Rate of Return Any bondholder, or any investor for that matter, will allow three factors to influence his or her required rate of return. The three factors are the following: real (pure) rate of return, inflation, and risk premium. These three factors equal the risk free rate which is the rate of return of an investment with no risk of financial loss. This is also the rate that investors would expect from an absolutely risk-free investment over a period of time. Inflation is the constant and progressive increase in the prices of goods and services. If the total rate of return was below the actual economic interest rates then this would cause the lender (investor) to pay the borrower for use of his or her funds. So instead of creating mass chaos in our economic system, the inflation premium of interest rates results from lenders compensating for expected inflation by pushing interest rates higher. An example that can derive from taking the inflation premium into account is that when inflation is high, or expected to decline, look for long-term fixed rate bonds to “lock in” high market values. The real rate of return and the inflation premium determine the risk free rate of return. As an example, if the real rate of return were 2 percent and the inflation premium 3 percent, then we can say that the risk free rate of return is 5 percent. The real rate of return is described by our Corporate Finance book as the financial “rent” the investor charges for using his or her funds for one year. For example, if you make a $10,000 investment that earns 8% in one year, you would end the year with $10,800. So, you earn an extra $800, however, if inflation is at 3% for the year, your $10,800 is only worth $10,500. Your real rate of return is only 5%. Investors depending on dividends or interest from bonds are most affected by the costs of inflation. Stocks can be a little safer because companies can pass the higher cost of inflation
gains yield plus the dividend yield on a security is called the:
A. geometric return.
B. average period return.
C. current yield.
D. total return.
The expected return on a security in the market context is:
A. a negative function of execs security risk.
B. a positive function of the beta.
C. a negative function of the beta.
D. a positive function of the excess security risk.
E. independent of beta.
A capital gain occurs when:
A. the selling price is less than the purchase….
Factors That Influence Exchange Rates
Aside from factors such as interest rates and inflation, the exchange rate is one of the most important determinants of a country's relative level of economic health. Exchange rates play a vital role in a country's level of trade, which is critical to most every free market economy in the world. For this reason, exchange rates are among the most watched, analyzed and governmentally manipulated economic measures. But exchange rates matter on a smaller scale….
Internal Rate of Return
Meaning of Capital Budgeting
Capital budgeting can be defined as the process
of analyzing, evaluating, and deciding whether
resources should be allocated to a project or
Capital budgeting addresses the issue of
strategic long-term investment decisions.
Process of capital budgeting ensure optimal
allocation of resources and helps management
work towards the goal of shareholder wealth
Why Capital Budgeting is so Important?
Accounting rate of return
Accounting rate of return (also known as simple rate of return) is the ratio of estimated accounting profit of a project to the average investment made in the project. ARR is used in investment appraisal.
Accounting Rate of Return is calculated using the following formula:
Average Accounting Profit
Average accounting profit is the arithmetic mean of accounting income expected to be earned during each year of the project's life time….
is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. She is highly risk averse and has asked for your advice. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should….
financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as follows:
|Investment |Expected return |Expected risk |
| | |index |
|X |14% |7% |
|y |12 |8 |
Internal Rate of Return
In investment decision analysis you may need to calculate internal rate of return. “Internal rate of return (IRR) is the discount rate that gives the project a zero NPV” (McLaney, 2006). It is a good choice to use for investment projects. There is a formula for the internal rate of return:
(A is the lower discount rate and B is the higher rate, a is the NPV at the lower rate and b is the NPV at the higher rate.) For example the Net Present Value (NPV) is 88 when the….
Factors Affecting Reaction Rate
Chemical reactions occur at different rates. In
this experiment you will consider some of the
key factors that influence the rate of a
nature of reactants - particle size
According to the collision theory, the rate of a
reaction depends on the frequency of
collisions between reacting particles. The
more frequent the collisions, the faster the rate
of the reaction. However, in order….
INTERNAL RATE OF RETURN
Many companies wants to have a return on their investment in a few years and begin to evaluate their projects optimistically calculating an internal rate of real return not yielding results in the end. This does not end up being expected by the companies; According to the article the authors John C. Kelleher and Justin J. MacCormack . They suggest that there is a tendency to a risky behavior, Companies started to run the risk of creating unrealistic numbers for themselves….
Accounting rate of return
The accounting rate of return (ARR) is a way of comparing the profits you expect to make from an investment to the amount you need to invest.
The ARR is normally calculated as the average annual profit you expect over the life of an investment project, compared with the average amount of capital invested. For example, if a project requires an average investment of £100,000 and is expected to produce an average annual profit of £15,000, the ARR would be 15 per cent.