A pure discount (or zero-coupon) government bond is issued today that promises to pay $25,000 in 20 years. If the current interest rate on similar bonds is 2%,
what is the price of the bond? Recall that the compounding interval for bonds is 6 months.
(5 points) The bitterly cold winter was partly to blame for the contraction of the U.S. economy in the first quarter of 2014 as it affected a large swath of
the U.S. for an extended period of time. Which type of risk does it represent for shareholders of
(5 points) The capital budget decision based on the IRR rule for a project with conventional cash flows (cash outflows followed
by only cash inflows) is consistent with the decision based on the NPV rule for the same project.
he city of Middleville
Bonds and Stocks
# Value created by ideas/project/entities/you
# We have seen this before: A loan
Zero -Coupon Bonds
# This bond has only one payment, the face value, at maturity
Discount (Why?) Bonds
# The price of a discount bond is
Snag-Shot of an IdealPro'lectlFirl NPV: Value Creation
I The NPV is dened as:
C C C
NPV=I + 1+ 22+...+ "n
O . .
1 + r 1 + r l + .l
where In (or CD) is the investment cost of the project
and C,- is the cash flow in period i. 00min
# Another form of financing
# How is it different from a bond?
Is it an IOU, really? Maybe
Who gets paid first?
How are you paid back?
Selling (gain, worse)
Does equity have a life?
Pricing a Stock
#How is a stock price
NPV: MEASURING VALUE CREATION
The NPV is defined as:
# There are twto basic ingredients to conducting a valutaion:
Cash Flows: Who do they belong to?
Cost of Capital, r: Who does this "belong" t
# The highsest is not always the best choice
# All value is relative!
Wich one would you choose?
INTRODUCTION TO FINANCE
REVIEW OF STATISTICS
A Review of Statistics
In a world with uncertainty, we typically describe possible
future values or rates of return of a security and the relative
likelihoods of these values by means of a probability
Financial statement analysis
We know business is mainly concerned with the financial
activities. In order to ascertain the financial status of the
business every enterprise prepares certain statements,
known as financial statement
leadership is that
status quo and
Types of Change
Facilitator: Gabriel Maibvisira
MSU Graduate School of Business
Contact: Cell 0772 977 025
=Change refers to any alteration that occurs in the
environment. Newstroom & Davies (1993:2
Financial analysis is a process of selecting, evaluating, and interpreting
financial data, along with other pertinent information, in order to formulate an
assessment of a companys present and future financial condition and
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