Chapter 21 Short-term Investing
The usual instruments for short-term investments are:
- Bank deposits & CDs
- Short-term bills/paper/notes
Idea: MNCs with excess cash for a short term period (7 days,
CHAPTERS 20 & 21 BRIEF ASSESMENT
1. Cammy Co., a U.S. firm, needs funding for the next 90 days. Its planning to borrow 80% from a Swiss
bank and the remaining 20% from a Brazilian bank. The forecasts
Q: How is the future 3-mo. LIBOR calculate?
A: Eurodollar futures reflect market expectations of forward 3-month rates. An implied forward rate
indicates approximately where short-term rates may be e
The swap coupon mid-rate is 6.68524%.
Example: Go back to the previous Example. .
Now, Housemann Bank wants to price a one-year swap with semiannual fixed-rate payments against
6-month LIBOR.
The sw
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2013 AFP
Esti
Quoted nominal return = r = r* + IP + DRP + MRP + LP
where r = the quoted, or nominal rate on a given security
r* = real risk-free rate
IP = inflation premium (the average of expected future inflation
Bond valuation
Market value vs. intrinsic (fair) value
Market value: the actual market price, determined by the market conditions
(1) Intrinsic value: present value of expected future cash flows, fai
(3) Yield to call: the return from a bond if it is held until called
Example: a 10-year bond carries a 6% coupon rate and pays interest
semiannually. The market price of the bond is $910.00. The bond
Approximation: (5.5%)*2 - 5% = 6%
(2) Liquidity preference theory: other things constant, investors prefer to make
short-term loans, therefore, they would like to lend short-term funds at lower rates
Bond rating
Importance: firms credit
Moodys and S&P provide bond ratings
AAA
AA
A
Investment-grade bonds
BBB
BB
B
Junk bonds
.
Table 5-1: Bond Rating, Default Risk, and Yields
Criteria to consider
Fi
Example: given the information about stocks X, Y, and Z below (X, Y, and Z
are positively but not perfectly correlated), assuming stock market equilibrium:
Stock
X
Y
Z
Expected Return
9.00%
10.75%
12.
Chapter 6 - Risk, Return, and CAPM
Investment returns
Risk
Expected rate of return and standard deviation
Return on a portfolio and portfolio risk
Beta coefficient - market risk
Relationship between r
Interest rates
Cost of borrowing money
Interest rate = risk-free rate + risk premiums
Fundamental factors that affect interest rates
Production opportunities
Time preference for consumption
Risk
Infl
Beyond the numbers
Tied to one customer?
Tied to one product?
Rely on one supplier?
Operations overseas?
Competition?
Future products?
Legal issues?
Exercise
Read summary
ST-1
Problems: 3, 4, 6, and
Chapter 5 - Bond Valuation and Interest Rates
Who issues bonds
Characteristics of bonds
Bond valuation
Important relationships in bond pricing
Bond rating
The determinants of market interest rates
Ter
(3) Shareholders equity statement
Last years end balance
Add this years R/E = NI - Common stock cash dividend
This years end balance
Table 2-3: MicroDrive Inc. Shareholders Equity Statement
(4) Cash f
In the above question, what is your annual payment if the first payment is made
today?
PMT = $3,239.81
Example: you win a lottery and face two choices. You can receive a lump sum of
$100,000 today or
Answer:
Step 1: price of the car in four years = 58,492.93
(PV = -50,000, I/YR = 4%, N = 4, PMT = 0, FV = 58,492.93)
Step 2: for annual deposit, FV = 58,492.93, I/YR = 6%, N = 4, PV = 0, and solve
for
Chapter 2 - Financial Statements, Cash Flow, and Taxes
Financial statements and reports
Basic financial statements
Free cash flow
MVA and EVA
Income taxes
Financial statements and reports
Annual repor
Working capital: refers to current assets
Net working capital = current assets - current liabilities
Net operating working capital (NOWC) = current assets - (current liabilities notes payable)
Market
Chapter 1 - An Overview of Financial Management
Cash flows between capital markets and firms operations
Corporate life cycle
The goal of a firm
Capital allocation process
Financial securities
Financia
Benchmarking
The process of comparing a particular company with a set of benchmark
companies (or the industry)
Table 3-2: MicroDrive Inc. Financial Ratios
Du Pont equations
ROA = net income / total a
Private markets vs. public markets
Private markets: transactions are negotiated directly between two parties
Public markets: standardized contracts are traded on organized exchanges
Derivative markets