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# Notes 1 - 2 Required rate of return – What you investor...

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171a Concepts and theories Rate of return P0 - Buy P1 – Sell D1 – Dividend R – Rate of return r = P1 + D1 – P0 P0 P2 - Sell D2 - Dividend NPV = -P0 + D1 + D2 + P2 1+r (1+r)^2 NPV greater than 0 = Accept NPV less than 0 = Reject r = IRR = set NPV equal to 0 Asset Value V = Discounted sum of future cash flows V = C1 + C2 + C3 …… + Cn (1+r) (1+r)^2 (1+3)^3 (1+r)^n Bonds 1. Coupon Rate - % of face value (Par Value) of bond; remains fixed thru maturity
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Unformatted text preview: 2. Required rate of return – What you, investor, requires as rate of return in other to invest in a security 3. Market rate of return (Expected rate of return) – Return that market thinks the investment should get back 4. Actual (realized) rate of return – The real return Economics Demand + Supply Quantity Demanded = Quantity Supplied = Equilibrium Demand + Supply of Funds-Interest rates...
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