Why 620 what is a bonds yield to maturity ytm briefly

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Unformatted text preview: maturity. 6–19 As a risk-averse investor, would you prefer bonds with short or long periods until maturity? Why? 6–20 What is a bond’s yield to maturity (YTM)? Briefly describe both the trialand-error approach and the use of a financial calculator for finding YTM. CHAPTER 6 Interest Rates and Bond Valuation 293 S U M M A RY FOCUS ON VALUE Interest rates and required returns embody the real cost of money, inflationary expectations, and issuer and issue risk. They reflect the level of return required by market participants as compensation for the risk perceived in a specific security or asset investment. Because these returns are affected by economic expectations, they vary as a function of time, typically rising for longer-term maturities or transactions. The yield curve reflects such market expectations at any point in time. The value of an asset can be found by calculating the present value of its expected cash flows, using the required return as the discount rate. Bonds are the easiest financial assets to value, because both the amounts and the timing of their cash flows are contractual and therefore known with certainty. The financial manager needs to understand how to apply valuation techniques to bonds, stocks, and tangible assets (as will be demonstrated in the following chapters) in order to make decisions that are consistent with the firm’s share price maximization goal. REVIEW OF LEARNING GOALS Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. The flow of funds between savers (suppliers) and investors (demanders) is regulated by the interest rate or required return. In a perfect, inflation-free, certain world there would be one cost of money— the real rate of interest. The nominal or actual interest rate is the sum of the risk-free rate, which is the sum of the real rate of interest and the inflationary expectation premium, and a risk premium reflecting issuer and issue characteristics. For any class of similar-risk securities, the term structure...
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This document was uploaded on 01/19/2014.

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