Eng 111 - Week 7 Handout (1)

Eng 111 - Week 7 Handout (1) - Bond Risks(Market Interest...

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Week 7 Discussion Handout: Project Evaluation 11/3/2011 TA: Ravichandran Ramakrishnan Example: (Ch 7, 11)A project has a required return of R an initial cost of I and uses straight line depreciation over N years. It has no salvage value and no net working capita needs. Find the IRR and NPV at the accounting, cash flow, and financial break-even points. Example: (Ch 7, 21): Carl the writer is offered a deal the studio will buy his script for $12,000 or 1% of the movie’s profits. There is a 90% chance the script is bad and the studio will just throw it away. If the script is good the studio will make it into a movie. If the movie is bad (70%) it will make 0 profit. If it is good it will make 20 million. What should Carl’s decision be?
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Unformatted text preview: Bond Risks: (Market) Interest Rate Risk: Interest Rates rises and fall constantly. If interest rates rise bond prices will fall (why?) The risk of this occurring is interest rate increase Reinvestment Risk As you receive coupons (interest payments) you need to investment them at the prevailing market rate. Reinvestment risk is when you can only invest coupons at a rate lower than the yield of your bond. How does the size and structure of coupon payments affect reinvestment risk? Credit Risk is the risk that the bond issuer doesn’t pay. The higher the probability of default the higher the bond yield. Why do greek ten year government bonds have a yield of 26% why? http://www.treasury.gov/services/Pages/bonds-securites.aspx...
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This note was uploaded on 12/05/2011 for the course ENGINEERIN 111 taught by Professor Melihabulu-taciroglu during the Fall '11 term at UCLA.

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