Lecture05_winter09

Lecture05_winter09 - VALUATION RELATIONSHIP BETWEEN THE...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
VALUATION
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
RELATIONSHIP BETWEEN THE PRICE OF AN ASSET AND RATE OF RETURN Interpretation of Interest Rate It represents the rate of return you want the funds you own to earn (Opportunity Cost). Relation Between Interest Rate and Present Value of Cash flows in the Future Inverse. The Higher the Interest Rate, the Lower the Present Value of the Cash Flow.
Background image of page 2
RELATIONSHIP BETWEEN THE PRICE OF AN ASSET AND RATE OF RETURN The Price of an Asset is the Present Value of the Cash Flows it promises to deliver in the future The higher the interest rate, the lower the Price of the Asset should be. Does this make sense?
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
RELATIONSHIP BETWEEN THE PRICE OF AN ASSET AND RATE OF RETURN Yes. The return you get from an Asset is the relation between the money you receive from it and the money you paid for them. Remember the formula The lower the price you pay for the Asset, the higher the rate of return you will earn is!! 0 0 1 0 P P P P C R
Background image of page 4
RELATIONSHIP BETWEEN THE PRICE OF AN ASSET AND RATE OF RETURN Suppose you have two Bonds, both of them promise the same Coupon and have the same Maturity. However, one of them is less certain to actually deliver those payments.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/28/2012 for the course ECON 134a taught by Professor Lim during the Winter '08 term at UCSB.

Page1 / 24

Lecture05_winter09 - VALUATION RELATIONSHIP BETWEEN THE...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online