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135 (de) vizualizări23 paginiThe presentation is about time value of money. And measurement of risk in terms of rate and it's tradeof with returns. And valuation of bonds .

Mar 04, 2016

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The presentation is about time value of money. And measurement of risk in terms of rate and it's tradeof with returns. And valuation of bonds .

© All Rights Reserved

135 (de) vizualizări

The presentation is about time value of money. And measurement of risk in terms of rate and it's tradeof with returns. And valuation of bonds .

© All Rights Reserved

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and return, Valuation

Objectives of Financial

management

Profit maximisation/EPS

Wealth maximisation

After tax operational profits of a firm less the cost of funds used to

finance investments

Focus on stakeholders

who have direct link with the firm

I will gladly pay you Tuesday for a hamburger I

can eat today - Wimpie, from the Popeye cartoon

Learning Objectives

Explain the meaning of the time value of money and the

importance of the timing of cash flows in making financial

decisions

Calculate the future value and present value of cash flows for

one period and multiple periods

Solve for the interest rate implied by a given set of present

value and future value cash flows

Apply time value of money techniques to solve basic problems

facing financial managers

Use a calculator/excel sheet to solve time value of money

problems

Risk-return tradeoff - Investors will take on additional

risk only if they anticipate higher return.

Time value of money value of a unit of money is

different in different time periods

A rupee available today is worth more than a rupee

available at a future date.

This is because a rupee today can be invested to earn a

return.

Techniques

given deposit/principal that has become a part of

the principal at the end of a specified period

interest is received

amount

future amount

change in the market price of an asset /

investment

Calculation of expected return single period

Risk variability of actual return from the

expected return associated with a given asset

Measurement of risk

Sensitivity analysis

Probability distribution

Standard deviation

Co-efficient of variation

securities/assets

Portfolio risk

Correlation/covariance

Diversification

Systematic risk

securities

Non diversifiable/unavoidable

Unsystematic risk

Diversifiable/ avoidable

CAPM

between risk and expected/required rate of return

Explains the behaviour of security prices and

provides a mechanism to assess the impact of

proposed security investment on investors overall

portfolio risk and return

Provides a framework for basic risk return trade off in

portfolio management

Enables drawing certain implications about the risk

and size of risk premium necessary to compensate

for bearing risk

Efficiency of market

Assumptions

Investor preferences

level of risk or lowest risk for a given level of return

deviation respectively

Measure of risk

responsiveness/comovement of security return with

market return

return on the individual security over changes in

excess return on market portfolio

Beta of market portfolio is equal to 1

Index of systematic risk of individual security relative

to that of market portfolio

formula

The CAPM formula is: ra = rrf + Ba (rm-rrf)

Required Return = Risk free rate + (Market return Risk free rate) *

Beta

Portfolio Beta = (the sum of) {weight of security X Beta of security}

Valuation of bonds/debentures

government, government agencies and

business enterprises to raise a large sum of

money

Par value value on the face of the bond

Coupon rate specified interest rate available

on security

Maturity period number of years after which

the par/specified value is payable to the

Illustration

rate, 10 year bond with a Rs. 1000 par value

that pays interest semi-annually. A bond

holder would have contractual right to

* par value (.10*1000) paid as Rs 50 at the end of

every 6 months

obliged to make from the beginning till maturity

Appropriate discount rate would be the required return

commensurate risk and prevailing interest rate

When the required return is equal to the coupon rate, the

bond value equals the par value

values

Time to maturity

RR

Bond value

Constant RR

Changing RR

impact on bond value caused by a given change in

the required return

Yield to maturity

bond at a specific price and hold it till maturity

Illustration

to be earned on a given security over an

infinite time horizon

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