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CFA Level I Cost of Capital Lecture - Part 2 - by Mr. Arif Irfanullah
 
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This CFA Level I video covers concepts related to: • Cost of Debt • Yield to Maturity Approach • Debt Rating Approach • Cost of Preferred Stock • Cost of Common Equity • Capital Asset Pricing Model • Dividend Discount Model Approach • Bond Yield Plus Risk Premium Approach For more updated CFA videos, Please visit www.arifirfanullah.com.
Views: 26094 IFT
Relationship between bond prices and interest rates | Finance & Capital Markets | Khan Academy
 
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Why bond prices move inversely to changes in interest rate. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/bonds-tutorial/v/treasury-bond-prices-and-yields?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/bonds-tutorial/v/introduction-to-the-yield-curve?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: Both corporations and governments can borrow money by selling bonds. This tutorial explains how this works and how bond prices relate to interest rates. In general, understanding this not only helps you with your own investing, but gives you a lens on the entire global economy. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy
Views: 583076 Khan Academy
CFA Level 1- Question Bank- Cost of Equity using Bond Yield + Premium Approach
 
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FinTree website link: http://www.fintreeindia.com FB Page link :http://www.facebook.com/Fin... We love what we do, and we make awesome video lectures for CFA and FRM exams. Our Video Lectures are comprehensive, easy to understand and most importantly, fun to study with! This Video was recorded during a one of the CFA Classes in Pune by Mr. Utkarsh Jain.
Risk Premium 1
 
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What is a risk premium? An introduction into what a bond is. Video by Chase DeHan, Assistant Professor of Finance at the University of South Carolina Upstate
Views: 17669 Harpett
Risk Premium for Stocks | Corporate Finance | CPA Exam BEC | CMA Exam | Chp 12 p 2
 
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A risk premium is the return in excess of the risk-free rate of return an investment is expected to yield; an asset's risk premium is a form of compensation for investors who tolerate the extra risk, compared to that of a risk-free asset, in a given investment. The government borrows money by issuing bonds in different forms. The ones we will focus on are the Treasury bills. These have the shortest time to maturity of the different government bonds. Because the government can always raise taxes to pay its bills, the debt represented by T-bills is virtually free of any default risk over its short life. Thus, we will call the rate of return on such debt the risk-free return, and we will use it as a kind of benchmark.
FRM: TI BA II+ to compute bond yield (YTM)
 
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Given four inputs (price, term/maturity, coupon rate, and face/par value), we can use the calculator's I/Y to find the bond's yield (yield to maturity). For more financial risk videos, visit our website! http://www.bionicturtle.com
Views: 145377 Bionic Turtle
Estimating The Cost Of Debt For WACC - DCF Model Insights
 
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In today’s video, we learn about calculating the cost of debt used in the weighted average cost of capital (WACC) calculation. This is part of the DCF insights series for more advanced students but it offers valuable insights about the assumptions used in the model. Like many other segments of the discounted cash flow (DCF) model, the cost of debt is very important. The four methods covered in the video are; - Yield to maturity (YTM) approach - Debt rating approach - Synthetic Rating Approach - Interest on Debt Approach Link to the country default spread and risk premium database; http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html Link to the bond profile for Apple Inc used in the video; http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=aapl&country=arg Link to an amazing presentation summarizing the DCF Model by Aswath Damodaran; http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/basics.pdf Please like and subscribe to my channel for more content every week. If you have any questions, please comment below. For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles
Views: 6269 FinanceKid
Expectation Theories of Yield Term Structures
 
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Pure expectations says the long spot rates predict future spot rates (i.e., the forward rate is an unbiased predictor of future spot rates). "Liquidity Preference" adds a RISK PREMIUM: investors in longer maturities demand compensation for maturity risk (e.g., uncertainty, greater duration/interest rate risk). "Preferred habitat" adds the technical factor of supply/demand.
Views: 34177 Bionic Turtle
What is RISK PREMIUM? What does RISK PREMIUM mean? RISK PREMIUM meaning, definition & explanation
 
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✪✪✪✪✪ WORK FROM HOME! Looking for WORKERS for simple Internet data entry JOBS. $15-20 per hour. SIGN UP here - http://jobs.theaudiopedia.com ✪✪✪✪✪ ✪✪✪✪✪ The Audiopedia Android application, INSTALL NOW - https://play.google.com/store/apps/details?id=com.wTheAudiopedia_8069473 ✪✪✪✪✪ What is RISK PREMIUM? What does RISK PREMIUM mean? RISK PREMIUM meaning - RISK PREMIUM definition - RISK PREMIUM explanation. Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license. For an individual, a risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset in order to induce an individual to hold the risky asset rather than the risk-free asset. It is positive if the person is risk averse. Thus it is the minimum willingness to accept compensation for the risk. The certainty equivalent, a related concept, is the guaranteed amount of money that an individual would view as equally desirable as a risky asset. For market outcomes, a risk premium is the actual excess of the expected return on a risky asset over the known return on the risk-free asset. Suppose a game show participant may choose one of two doors, one that hides $1,000 and one that hides $0. Further suppose that the host also allows the contestant to take $500 instead of choosing a door. The two options (choosing between door 1 and door 2, or taking $500) have the same expected value of $500, so no risk premium is being offered for choosing the doors rather than the guaranteed $500. A contestant unconcerned about risk is indifferent between these choices. A risk-averse contestant will choose no door and accept the guaranteed $500, while a risk-loving contestant will derive utility from the uncertainty and will therefore choose a door. If too many contestants are risk averse, the game show may encourage selection of the riskier choice (gambling on one of the doors) by offering a positive risk premium. If the game show offers $1,600 behind the good door, increasing to $800 the expected value of choosing between doors 1 and 2, the risk premium becomes $300 (i.e., $800 expected value minus $500 guaranteed amount). Contestants requiring a minimum risk compensation of less than $300 will choose a door instead of accepting the guaranteed $500. In finance, a common approach for measuring risk premia is to compare the risk-free return on T-bills and the risky return on other investments (using the ex post return as a proxy for the ex ante expected return). The difference between these two returns can be interpreted as a measure of the excess expected return on the risky asset. This excess expected return is known as the risk premium. Equity: In the stock market the risk premium is the expected return of a company stock, a group of company stocks, or a portfolio of all stock market company stocks, minus the risk-free rate. The return from equity is the sum of the dividend yield and capital gains. The risk premium for equities is also called the equity premium. Note that this is an unobservable quantity since no one knows for sure what the expected rate of return on equities is. Nonetheless, most people believe that there is a risk premium built into equities, and this is what encourages investors to place at least some of their money in equities. Debt: In the context of bonds, the term "risk premium" is often used to refer to the credit spread (the difference between the bond in
Views: 9333 The Audiopedia
Risk Free Rate
 
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ZACH DE GREGORIO, CPA www.WolvesAndFinance.com Discussion of the theoretical concept of the "Risk Free Rate." This also provides an explanation of why people use US Treasuries as the Risk Free Rate and why so many people watch the Yield Curve for US Treasuries. The Risk Free Rate is a theoretical concept that stands for the one investment opportunity that is the most risk free. It is not entirely without risk. It is finding the rate of the most risk free opportunity, because this sets the benchmark for your financial analysis. Every opportunity then exists on a spectrum of risk, starting at the risk free rate. How you use this on a practical level, is you would use US treasuries. The US economy is very large, consistent economy, and is considered as the least risky alternative. Government securities are considered less risky than companies. Governments generally don’t go bankrupt (with a few notable exceptions). Government securities are based on the productivity of a country’s people, who pay taxes which pay the interest on bonds. If the government budget ever gets into trouble they can raise taxes which makes it a low risk investment. This is a generalization and I am not hyping US treasuries. The goal is to pick some security to use as a benchmark for the risk free rate. The point is that everything is interrelated in finance. As the risk free rate moves up and down, it impacts everything else in finance. Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.
Views: 4115 WolvesAndFinance
Market Risk Premium Formula | Calculation | Examples
 
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In this video on Market Risk Premium, we are going to learn what is market risk premium? formula to calculate market risk premium, calculations with practical examples. 𝐖𝐡𝐚𝐭 𝐢𝐬 𝐌𝐚𝐫𝐤𝐞𝐭 𝐑𝐢𝐬𝐤 𝐏𝐫𝐞𝐦𝐢𝐮𝐦? ------------------------------------------------------ Market Risk Premium is the difference between the expected return from the investment and the risk free rate. 𝐌𝐚𝐫𝐤𝐞𝐭 𝐑𝐢𝐬𝐤 𝐏𝐫𝐞𝐦𝐢𝐮𝐦 𝐅𝐨𝐫𝐦𝐮𝐥𝐚 ------------------------------------------------------ Below is the formula to calculate market risk premium. 𝗠𝗮𝗿𝗸𝗲𝘁 𝗥𝗶𝘀𝗸 𝗣𝗿𝗲𝗺𝗶𝘂𝗺 𝗙𝗼𝗿𝗺𝘂𝗹𝗮 = 𝗘𝘅𝗽𝗲𝗰𝘁𝗲𝗱 𝗥𝗲𝘁𝘂𝗿𝗻 – 𝗥𝗶𝘀𝗸-𝗙𝗿𝗲𝗲 𝗥𝗮𝘁𝗲 𝐑𝐞𝐚𝐥 𝐌𝐚𝐫𝐤𝐞𝐭 𝐑𝐢𝐬𝐤 𝐏𝐫𝐞𝐦𝐢𝐮𝐦 𝐅𝐨𝐫𝐦𝐮𝐥𝐚 ---------------------------------------------------------------- Real Market Risk Premium formula = (1 + Nominal Rate / 1 + Inflation Rate) – 1 𝐄𝐱𝐚𝐦𝐩𝐥𝐞 𝐨𝐟 𝐌𝐚𝐫𝐤𝐞𝐭 𝐑𝐢𝐬𝐤 𝐏𝐫𝐞𝐦𝐢𝐮𝐦 𝐂𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐢𝐨𝐧 --------------------------------------------------------------------------------- Here in the below given example, we have two investments and we have also the information for expected return and risk free rate. Expected Return for the Investment 1 = 20% Expected Return for the Investment 2 = 21% Risk free rate for the Investment 1 = 8% Risk free rate for the Investment 2 = 8% Now by using the formula we will calculate the Market Risk Premium Market Risk Premium Formula = Expected Return – Risk-Free Rate Investment 1 = 20% - 8% Market Risk Premium for Investment 1 = 12% Investment 2 = 21% - 8% Market Risk Premium for Investment 2 = 13% To know more about the Market Risk Premium, you can go this 𝐥𝐢𝐧𝐤 𝐡𝐞𝐫𝐞:- https://www.wallstreetmojo.com/market-risk-premium/ Subscribe to our channel to get new updated videos. Click the button above to subscribe or click on the link below to subscribe - https://www.youtube.com/channel/UChlNXSK2tC9SJ2Fhhb2kOUw?sub_confirmation=1
Views: 858 WallStreetMojo
6.4 Risk Premium Introduction
 
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Asset Pricing with Prof. John H. Cochrane PART II. Module 6. Bonds More course details: https://faculty.chicagobooth.edu/john.cochrane/teaching/asset_pricing.htm
Views: 731 UChicago Online
Term Structure of Interest Rates - Modern - Risk Premium Based
 
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This is a brief introduction to how we think about the term structure of interest rates currently.
How to calculate the bond price and yield to maturity
 
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This video will show you how to calculate the bond price and yield to maturity in a financial calculator. If you need to find the Present value by hand please watch this video :) http://youtu.be/5uAICRPUzsM There are more videos for EXCEL as well Like and subscribe :) Please visit us at http://www.i-hate-math.com Thanks for learning
Views: 317188 I Hate Math Group, Inc
calculate and interpret the cost of equity capital using the capital asset pricing model approach,
 
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calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus risk-premium approach;
Views: 27 Ted Stephenson
The Bond Yield Curve and Risk Factors
 
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The Bond Yield Curve and Risk Factors Once you know what a bond is and how a bond works, you need to learn about the external risks that exist for people who choose to make money with bonds. This is best shown with what is called the bond yield curve. What are the risks that can affect a bond's value? Let me explain. Introduction to Bonds - https://claytrader.com/videos/how-bonds-work-and-make-you-money/ What Is Inflation? - https://claytrader.com/videos/what-is-inflation-what-causes-it/
Views: 603 ClayTrader
CAPM Capital Asset Pricing Model in 4 Easy Steps - What is Capital Asset Pricing Model Explained
 
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OMG wow! I'm SHOCKED how easy clicked here http://www.MBAbullshit.com for CAPM or Capital Asset Pricing Model. This is a model applied to indicate an investor's "expected return", or how much percentage profit a company investor ought to logically demand to be a "fair" return for making investments into a company. http://mbabullshit.com/blog/2011/08/06/capm-capital-asset-pricing-model/ To find this, yet another question can be queried: Just how much is the sound "decent" percentage % profit that a financier should probably receive if he invests in a business (having comparatively high risk) in contrast to putting his money in government bonds which might be regarded to be "risk free" and instead of putting his hard earned cash in the general share market presumed to offer "medium" risk? Visibly, it is almost only "fair" that in fact the investor receives a gain higher compared to the government bond percentage (due to the reason that the solitary enterprise possesses higher risk). It's moreover only just that he should expect a return larger than the broad stock exchange yield, because the specific business enterprise has higher risk compared to the "medium risk" general stock market. So just as before,how much exactly should this investor fairly receive as a smallest expected return? This is where the CAPM Model or Capital Asset Pricing Model comes in. The CAPM Formula includes all these variables simultaneously: riskiness of the individual firm depicted by its "beta", riskiness of the universal stock market, rate of interest a "risk free" government bond would give, as well as others... and then spits out an actual percent which your investor "should be allowed" to take for investing his or her hard earned money into this "riskier" single firm. This particularly exact percent is known as the "expected return", given that it can be the yield that he should "expect" or require to obtain if he invests his hard earned cash into a specific firm. This precise percentage is known as the "cost of equity". The CAPM Model or CAPM Formula looks something like this: Expected Return = Govt. Bond Rate + (Risk represented by "Beta")(General Stock Market Return --Govt. Bond Rate) Utilizing this formula, you are able to see the theoretically exact rate of return theindividual business enterprise investor ought to reasonably expect for his or her investment, if the CAPM Model or Capital Asset Pricing Model is to be held. http://www.youtube.com/watch?v=LWsEJYPSw0k What is CAPM? What is the Capital Asset Pricing Model?
Views: 522183 MBAbullshitDotCom
Calculating the Yield of a Zero Coupon Bond
 
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This video demonstrates how to calculate the yield-to-maturity of a zero-coupon bond. It also provides a formula that can be used to calculate the YTM of any zero-coupon bond. Edspira is your source for business and financial education. To view the entire video library for free, visit http://www.Edspira.com To like us on Facebook, visit https://www.facebook.com/Edspira Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. The goal of Michael's life is to increase access to education so all people can achieve their dreams. To learn more about Michael's story, visit http://www.MichaelMcLaughlin.com To follow Michael on Facebook, visit https://facebook.com/Prof.Michael.McLaughlin To follow Michael on Twitter, visit https://twitter.com/Prof_McLaughlin
Views: 42096 Edspira
What is a Risk-Free Rate?
 
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Welcome to the Investors Trading Academy talking glossary of financial terms and events. Our word of the day is “Risk-Free Rate” The risk-free rate is the rate of return that investors require for investments with no risk. In essence, this return compensates investors for the time value of money. Inflation dictates that money in the future will not purchase as much as it does now, and the risk-free rate compensates investors for the time that their capital is tied up. Typically, Treasury rates are used as measures of risk-free rates. It is generally good practice to match the duration of the Treasury holding to the length of time of the average return. Alternatively, there are arguments made that since equities are indefinite investment vehicles, the longest-term Treasury should be used. Whatever you choose to use as the risk-free rate is not as important as staying consistent throughout your calculations. However, it is important that you choose a reasonable risk-free rate. By Barry Norman, Investors Trading Academy
CFA Level I: Corporate Finance - Cost of Capital LOS A
 
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FinTree website link: http://www.fintreeindia.com FB Page link :http://www.facebook.com/Fin... These video series covers the following key area: -the weighted average cost of capital (WACC) of a company; -how taxes affect the cost of capital from different capital sources; -the use of target capital structure in estimating WACC and how target capital structure weights may be determined; -how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget; -the marginal cost of capital’s role in determining the net present value of a project; -the cost of debt capital using the yield-to-maturity approach and the debt-rating approach; - the cost of noncallable, nonconvertible preferred stock; -the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus risk-premium approach; -the beta and cost of capital for a project -uses of country risk premiums in estimating the cost of equity; -the marginal cost of capital schedule, explain why it may be upward-sloping with respect to additional capital, and calculate and interpret its break-points; - the correct treatment of flotation costs. We love what we do, and we make awesome video lectures for CFA and FRM exams. Our Video Lectures are comprehensive, easy to understand and most importantly, fun to study with! This Video lecture was recorded by our popular trainer for CFA, Mr. Utkarsh Jain, during one of his live CFA Level I Classes in Pune (India).
Real and nominal return | Inflation | Finance & Capital Markets | Khan Academy
 
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Inflation and real and nominal return. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/inflation-tutorial/real-nominal-return-tut/v/calculating-real-return-in-last-year-dollars?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/inflation-tutorial/inflation-scenarios-tutorial/v/hyperinflation?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: If the value of money is constantly changing, can we compare investment return in the future or past to that earned in the present? This tutorial focuses on how to do this (another good tutorial to watch is the one on "present value"). About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy
Views: 178056 Khan Academy
Risk Premium 2
 
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Second video discussing how to graph a risk premium in a bond market. Video by Chase DeHan, Assistant Professor of Finance at the University of South Carolina Upstate
Views: 1880 Harpett
Introduction to bonds | Stocks and bonds | Finance & Capital Markets | Khan Academy
 
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What it means to buy a bond. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/bonds-tutorial/v/introduction-to-the-yield-curve?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/bonds-tutorial/v/corporate-debt-versus-traditional-mortgages?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: Both corporations and governments can borrow money by selling bonds. This tutorial explains how this works and how bond prices relate to interest rates. In general, understanding this not only helps you with your own investing, but gives you a lens on the entire global economy. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy
Views: 565469 Khan Academy
Bonds Default Risk and Credit Ratings
 
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Bond default risk; bond credit ratings; determinants of credit ratings; yield spreads of corporate and municipal bonds over Treasuries
Views: 2089 Elinda Kiss
Session 5: Equity Risk Premiums  - Country & Company
 
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In this session, we started by doing a brief test on risk premiums. After a brief foray into lambda, a more composite way of measuring country risk, we spent the rest of the session talking about the dynamics of implied equity risk premiums and what makes them go up, down or stay unchanged. We then moved to cross market comparisons, first by comparing the ERP to bond default spreads, then bringing in real estate risk premiums and then extending the concept to comparing ERPs across countries. Finally, I made the argument that you should not stray too far from the current implied premium, when valuing individual companies, because doing so will make your end valuation a function of what you think about the market and the company. If you have strong views on the market being over valued or under valued, it is best to separate it from your company valuation. I am attaching the excel spreadsheet that I used to compute the implied ERP at the start of February 2019. Play with it when you get a chance. Implied ERP for February 2019: http://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb19.xlsx Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/risktest.pdf Slides: http://www.stern.nyu.edu/~adamodar/podcasts/valspr19/session5slides.pdf Post Class Test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session5test.pdf Post Class Test Solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session5soln.pdf
Views: 2973 Aswath Damodaran
Bear Markets Explained - The Critical Risk Premium Spread 2018
 
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Bear markets explained using risk premium spreads! Today we’ll measure the current risk premium in the market. We’ll take a look at risk premium spreads and see how much longer this bull has to run before the next bear market. Make sure you review this video that explains risk premium spreads before continuing: https://youtu.be/H1ZDRzPX4_0 When the Fed lowers interest rates, it affects the risk premium of every asset class. It lowers the return on bonds and widens the spread between safer assets like cash and bonds and riskier assets like stocks. The larger spread means risk assets become more attractive relative to safe ones. And because of the lower return in safe assets, investors have to move out on the risk curve into riskier assets to maintain their returns. This causes riskier assets like stocks to get bid up, driving valuations higher. And when valuations increase, expected future returns go down. Eventually risk premium spreads get pulled really tight together. Valuations get so high that expected returns in stocks almost equal cash… but with much higher volatility. This happens during the late cycle phase of the short-term debt cycle. And by this point no one wants to hold stocks which is why we get bear markets as investors sell their stocks and allocate towards cash and bonds. In the video above we’ll use GMO’s 7 year asset class real return forecast, the inverse of the CAPE minus the rate on 10-year bonds adjusted for inflation, and the rolling 5-year average annual return to equities relative to 2-year bonds to determine the current risk premium in the market. Putting that information together we can see that we’re in the late cycle phase of this bull. But that phase lasts between 18 and 30 months. And we’re closer to the middle than the end. This puts the next bear market around 12-18 months from now. Watch the video above for more! And as always, Remember to Stay Fallible Investors! ***All content, opinions, and commentary by Fallible is intended for general information and educational purposes only.
Session 6: Equity Risk Premiums
 
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We started this class by tying up the last loose ends with risk free rates: how to estimate the risk free rate in a currency where there is no default free entity issuing bonds in that currency and why risk free rates vary across currencies. The key lesson is that much as we would like to believe that riskfree rates are set by banks, they come from fundamentals - growth and inflation. I have a post on risk free rates that you might find of use: http://aswathdamodaran.blogspot.com/2015/04/dealing-with-low-interest-rates.html The rest of today's class was spent talking about equity risk premiums. The key theme to take away is that equity risk premiums don't come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at three different ways of estimating the equity risk premium -a survey premium, a historical premium and an implied premium, and how to extend the approach to estimating risk premiums in other markets. Slides: http://www.stern.nyu.edu/~adamodar/podcasts/cfspr19/session6slides.pdf Post Class Test: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session6test.pdf Post Class Test Solution: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session6soln.pdf
Views: 3552 Aswath Damodaran
FRM: How to get yield to maturity (YTM) with Excel & TI BA II+
 
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Yield to maturity (YTM, yield) is the bond's internal rate of return (IRR). It is the rate that discounts future cash flows to the current market price. For more financial risk management videos, visit our website at http://www.bionicturtle.com
Views: 229347 Bionic Turtle
Introduction to The Equity Risk Premium
 
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Professor David Hillier, University of Strathclyde; Short videos for my students Check out www.david-hillier.com for my personal website.
Views: 3058 David Hillier
How to find the Expected Return and Risk
 
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Hi Guys, This video will show you how to find the expected return and risk of a single portfolio. This example will show you the higher the risk the higher the return. Please watch more videos at www.i-hate-math.com Thanks for learning !
Views: 224280 I Hate Math Group, Inc
Bond Pricing, Valuation, Formulas, and Functions in Excel
 
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Premium Course: https://www.teachexcel.com/premium-courses/68/idiot-proof-forms-in-excel?src=youtube Excel Forum: https://www.teachexcel.com/talk/microsoft-office?src=yt Excel Tutorials: https://www.teachexcel.com/src=yt This tutorial will show you how to calculate bond pricing and valuation in excel. This teaches you how to do so through using the NPER() PMT() FV() RATE() and PV() functions and formulas in excel. To follow along with this tutorial and download the spreadsheet used and or to get free excel macros, keyboard shortcuts, and forums, go to: http://www.TeachMsOffice.com
Views: 191083 TeachExcel
Risk Free Rate of Returns don't Exist
 
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These videos go through the syllabus objectives for the Financial Exams of ST5/F105/SA5/F205. They are raw, unedited and contain a large amount of opinion. I've taken a skeptical approach to the subject and my views may not be correct. Feel free to correct me in the comment section below. I'll be releasing a new video every day.
Views: 1072 MJ the Fellow Actuary
Understanding the yield curve
 
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You read about it a lot in the business pages, and it sounds super complicated. But the yield curve is dead easy to read. Especially if you've every played chutes and ladders (or, snakes and ladders in the UK). Paddy Hirsch explains. #MarketplaceAPM #EconomicExplainers Subscribe to our channel! https://youtube.com/user/marketplacevideos
Views: 63716 Marketplace APM
Bond Yields Don't Tell a Nice Story
 
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What do I do? Full-time independent stock market analyst and researcher: https://sven-carlin-research-platform.teachable.com/p/stock-market-research-platform Check the comparative stock list table on my Stock market research platform under curriculum preview! I am also a book author: Modern Value Investing book: https://amzn.to/2lvfH3t More about me and some written reports at the Sven Carlin blog: https://svencarlin.com Stock market for modern value investors Facebook Group: https://www.facebook.com/groups/modernvalueinvesting/ As an investor it is extremely important to keep an eye on bond yields as stock valuations depend on their risk premium. The higher interest rates are the lower are stock values. In this video we discuss treasury yields, what is the market's perception about them and how to position yourself and your portfolio.
What is COST OF EQUITY? What does COST OF EQUITY mean? COST OF EQUITY meaning & explanation
 
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What is COST OF EQUITY? What does COST OF EQUITY mean? COST OF EQUITY meaning - COST OF EQUITY definition - COST OF EQUITY explanation. Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license. In finance, the cost of equity is the return (often expressed as a rate of return) a firm theoretically pays to its equity investors, i.e., shareholders, to compensate for the risk they undertake by investing their capital. Firms need to acquire capital from others to operate and grow. Individuals and organizations who are willing to provide their funds to others naturally desire to be rewarded. Just as landlords seek rents on their property, capital providers seek returns on their funds, which must be commensurate with the risk undertaken. Firms obtain capital from two kinds of sources: lenders and equity investors. From the perspective of capital providers, lenders seek to be rewarded with interest and equity investors seek dividends and/or appreciation in the value of their investment (capital gain). From a firm's perspective, they must pay for the capital it obtains from others, which is called its cost of capital. Such costs are separated into a firm's cost of debt and cost of equity and attributed to these two kinds of capital sources. While a firm's present cost of debt is relatively easy to determine from observation of interest rates in the capital markets, its current cost of equity is unobservable and must be estimated. Finance theory and practice offers various models for estimating a particular firm's cost of equity such as the capital asset pricing model, or CAPM. Another method is derived from the Gordon Model, which is a discounted cash flow model based on dividend returns and eventual capital return from the sale of the investment. Another simple method is the Bond Yield Plus Risk Premium (BYPRP), where a subjective risk premium is added to the firm's long-term debt interest rate. Moreover, a firm's overall cost of capital, which consists of the two types of capital costs, can be estimated using the weighted average cost of capital model. According to finance theory, as a firm's risk increases/decreases, its cost of capital increases/decreases. This theory is linked to observation of human behavior and logic: capital providers expect reward for offering their funds to others. Such providers are usually rational and prudent preferring safety over risk. They naturally require an extra reward as an incentive to place their capital in a riskier investment instead of a safer one. If an investment's risk increases, capital providers demand higher returns or they will place their capital elsewhere. Knowing a firm's cost of capital is needed in order to make better decisions. Managers make capital budgeting decisions while capital providers make decisions about lending and investment. Such decisions can be made after quantitative analysis that typically uses a firm's cost of capital as a model input.
Views: 3667 The Audiopedia
Level I CFA: CF Cost of Capital-Lecture 2
 
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2018 Reading 36 2019 Reading 35 This CFA exam prep video Costs of the different sources of capital - Cost of debt - Cost of preferred stock - Cost of common equity Capital asset pricing model Dividend discount model Bond yield plus risk premium approach For the COMPLETE SET of 2018 Level I Videos sign up for the IFT Level I FREE VIDEOS Package: https://ift.world/free Subscribe now: http://www.youtube.com/user/arifirfanullah?sub_confirmation=1 For more videos, notes, practice questions, mock exams and more visit: https://www.ift.world/ Visit us on Facebook: https://www.facebook.com/Pass.with.IFT/
Views: 18108 IFT
Money and Banking - Lecture 44 HD
 
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Chapter 6. Risk Structure of interest rates, risk structure, term structure, risk, risk premium, default, default risk, credit risk, credit premium, spread, interest-rate spread, credit spread, inflation risk, inflation premium, currency risk, exchange-rate risk, currency premium, market price, market value, fundamental value, fair value, credit rating, creditworthiness, credit ratings agency, investment-grade bonds, speculative-grade bonds, junk binds, high-yield bonds, municipal bonds, tax-free bonds, taxable bonds, treasury bonds, corporate bonds, term structure of interest rates, yield curve, normal yield curve, upward-sloping yield curve, downward-sloping yield curve, inverted yield curve.
Views: 1020 Krassimir Petrov
Finding historical stock price, market index data, risk free rate for Capital Asset Pricing Model CA
 
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This Bloomberg video is prepared by Dr Anson Wong (AF), Dr Derek Yim (AF), and Mr William Ho (LIB) from the Hong Kong Polytechnic University, with funding support from UGC Teaching & Learning Project on enhancing information literacy in Hong Kong higher education through the development and implementation of shared interactive multimedia courseware (IL Project) from year 2016-2018.
Views: 1495 Pao Yue-kong Library
Not All Bonds are Created Equal
 
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(Schwab Bond Market Today 002) Last time Kathy spoke about the recent jump in bond yields and why we think some of it has to do with a rise in the risk premium for inflation that was held down by the Federal Reserve’s bond buying program. But what she has noticed is that hasn’t necessarily happened in other markets – like the corporate bond market. On this week’s episode of Bond Market Today, Kathy is joined by Collin Martin to discuss why that might be the case. Subscribe to our channel: https://www.youtube.com/charlesschwab Click here for more insights: http://www.schwab.com/insights/ (0218-8BL4)
Views: 3679 Charles Schwab
Professor Ilaria Piatti: Expected term structures
 
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Treasury bond yields can be decomposed into expectations about future short rates and a risk premia. A vast literature has investigated the properties of this decomposition, but while this has advanced our understanding of the economics of Treasuries, there are still many doubts about the statistical findings in the literature. This paper exploits an extensive dataset of yield curve forecasts to extract model-free measures of bond risk premia and studies whether their dynamics are consistent with the properties of standard measures of expected bond returns derived from realised data. Our panel of subjective bond risk premia also allows us to analyse explicitly the expectation formation process, by testing the empirical support of some of the most prominent models of information rigidities. https://www.sbs.ox.ac.uk/school/events-1/deans-seminar-series/summaries-videos
Session 6 (Undergraduate): Risk free Rates and Risk Premiums (Part 1)
 
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We started on the question of risk free rates and how to assess them in different currencies. In particular, we noted that government bonds are not always risk free and may have to be cleansed of default risk. The rest of today's class was spent talking about equity risk premiums. The key theme to take away is that equity risk premiums don't come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at two different ways of estimating the equity risk premium. 1. Survey Premiums: I had mentioned survey premiums in class and two in particular - one by Merrill of institutional investors and one of CFOs. You can find the Merrill survey on its research link (but you may be asked for a password). You can get the other surveys at the links below: CFO survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422008 Analyst survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2450452 2. Historical Premiums: We also talked about historical risk premiums. To see the raw data on historical premiums on my site (and save yourself the price you would pay for Ibbotson's data...) go to updated data on my website: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html Slides: http://www.stern.nyu.edu/~adamodar/podcasts/cfUGspr16/Session6.pdf Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session6atest.pdf Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session6asoln.pdf
Views: 4878 Aswath Damodaran
Financial Management - Lecture 25 HD
 
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yield, yield-to-maturity, discount bond, deep-discount bond, premium bond, zero-coupon bond, interest rate sensitivity, interest rate volatility, interest rate risk, secured vs unsecured, senior vs subordinated, Eurobonds, high-grade bonds, high-yield bonds, junk bonds, amortizing bond, callable bond, convertible bond, nominal interest rates, real interest rates, expected inflation, Fisher effect, Fisher equation, risk, risk premium, default risk, default premium, liquidity risk, liquidity premium, maturity risk, maturity premium, inflation risk, inflation premium, currency risk, currency premium, yield curve, normal yield curve, falling yield curve, inverted yield curve, rising yield curve, normal yield curve, steepening yield curve.
Views: 1469 Krassimir Petrov
Financial Management - Lecture 13
 
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interest rates levels, nominal interest rates, determinants of interest rates, quoted interest rates, nominal interest rates, real interest rates,risk-free interest rates, real risk-free interest rates, nominal risk-free interest rates, quoted risk-free interest rates, inflation, premium, risk premium, inflation premium, purchasing power, purchasing power premium, default risk, default risk premium, liquidity risk. liquidity premium, maturity risk, maturity risk premium, volatility risk, price risk, interest rate risk, expected inflation, fungible, fungibility, marketable, marketability, reinvestment risk, TIPS, calculation risk, inflation-reporting risk, risk-free bonds, default-risk bonds, currency denomination.
Views: 28543 Krassimir Petrov
Other risks facing bond investors
 
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Other risks facing bond investors Bonds - call risk In addition to interest rate risk and credit risk, bond investors face plenty of other risks. One is call risk. Call risk is the risk that the issuer will call back the high yielding bond that you hold and refinance the bond at a lower rate. This is the same risk that a mortgage holder faces when you try to refinance your mortgage at a lower rate. There are a couple of ways to view this risk. First, if you buy a high-yielding bond at a 20 percent premium, and then the bond issuer calls the bond back at only a 5 percent premium, you've lost a lot of money. The other way to view call risk is in terms of lost opportunities. If you have a high-yield, long-term bond, you're probably counting on enjoying the high interest payments for the life of the bond. But if the issuer calls the bond back, you've lost the ability to lock in those high interest rates for a long time. The best way to defend against this is to find out the call provisions of any bond before you buy it. Always find out the yield to call and yield to maturity before buying a bond. Because call risk offers a no-win situation to bondholders, investors demand higher interest payments than they would otherwise expect. This is why Ginnie Mae mortgage securities offer a higher yield than comparable US Treasury securities. Ginnie Mae mortgage securities and US Treasury bonds both are backed by the full faith and credit of the US government, but Ginnie Maes can be called or refinanced, while US Treasury bonds cannot be called. Reinvestment risk Much of the risk associated with call risk is the loss of the ability to lock in a high interest rate. This is related to reinvestment risk which is another risk facing bondholders. When you invest in bonds, you normally can have maintenance of principal or maintenance of income, but not both. This emphasizes the difference between investing in long-term or short-term bonds. Short-term bonds maintain principal, not income If you invest in short-term bonds, you limit your exposure to interest rate risk. The interest rate risk you're assuming is directly related to the duration of the bond. Suppose you're invested in a short-term bond fund whose duration is two years. If interest rates go up by 1 percent, your fund's value will drop by about 2 percent. But if you're invested in a mutual fund whose duration is 10 years, your fund's value will drop by about 10 percent if interest rates go up by 1 percent, so in this respect the long-term bond fund is riskier. Long-term bonds offer higher yields and steady income Since the long-term bond fund has more interest rate risk, you might be wondering why you should even consider investing in a long-term bond fund. There are two reasons for this. The first is that the long-term bond fund normally will have a higher yield. The second is that the long-term fund provides income stability to you by locking in interest payments for a longer time. Long-term bonds have a down side in that they may lock you into a low interest rate if other rates go up. But long-term bonds have an advantage because they lock you into high interest payments in case interest rates go down. Reinvestment risk defined The risk of interest rates going down is called reinvestment risk. Here's a great example of the danger associated with reinvestment risk. I recently listened to an audio tape which advised people on how to retire in their early 40s. The tape was produced in the mid-1980s. To retire at the early age of 40 the author recommended you sell your large, expensive house and retire to the countryside where you can live cheaply. The author, who was a CPA at a prestigious accounting firm and who had an MBA from Stanford, was no amateur when it came to money. But he made a mistake in his financial planning. He forgot about reinvestment risk. How to not retire at 40 Let's walk through what the author recommended. I'm estimating some numbers here, but they're probably good estimates. Assume the author sold a big house in Boston, and bought a small, inexpensive home in North Carolina. After swapping houses, let's say he had $400,000 in cash left over. So far so good. $400,00 is a lotta loot to retire on. Next the author placed all his money in insured, one-year certificates of deposit. He even divided his money into twelve parts and invested each twelfth over the course of a year. This technique of dividing your money up and investing over time is called laddering and is useful in reducing your interest rate risk. So this trained, intelligent accountant seemed to have it all figured out, right? He had little or no credit risk because of the insured nature of bank CDs, and he even broke his retirement stash up into twelfths to further cut his risk. So what's wrong with this? Need to use maturity matching Copyright 1997 by David Luhman
Views: 894 MoneyHop.com
Calculating the Forward Rate
 
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This video shows how to calculate the Forward Rate using yields from zero-coupon bonds. A comprehensive example is provided along with a formula to show how the Forward Rate is computed based on zero-coupon yields. Edspira is your source for business and financial education. To view the entire video library for free, visit http://www.Edspira.com To like us on Facebook, visit https://www.facebook.com/Edspira Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. The goal of Michael's life is to increase access to education so all people can achieve their dreams. To learn more about Michael's story, visit http://www.MichaelMcLaughlin.com To follow Michael on Facebook, visit https://facebook.com/Prof.Michael.McLaughlin To follow Michael on Twitter, visit https://twitter.com/Prof_McLaughlin
Views: 87288 Edspira
Bond Investing 101: Understanding Interest Rate Risk and Credit Risk
 
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This video is one part of BondSavvy's 10-part video "The Crash Course on Corporate Bond Investing." The full Crash Course video is included with a subscription to BondSavvy https://www.bondsavvy.com/corporate-bond-investment-picks or can be bought on its own here https://www.bondsavvy.com/a-la-carte/corporate-bond-investing-101. This video explains the differences between interest rate risk and credit risk and how you can factor this into your next corporate bond investment. Many investors only invest in investment-grade bonds because they are afraid of the default risk of high-yield (or below investment grade) bonds. The challenge with this thinking is that investment-grade bonds often have longer durations (or time until maturity) and are therefore more sensitive to changes in interest rates. To alleviate these risks, it's important for investors to consider both investment-grade and non-investment-grade corporate bonds. You will learn the following by watching this video: * Difference between investment-grade corporate bonds and high-yield corporate bonds * Difference in default rates between investment-grade corporate bonds and high-yield corporate bonds * How bond prices are quoted * How owning high-yield corporate bonds can help reduce investors' interest rate risk * Why shorter-dated bonds are less sensitive to changes in interest rates * What happens to bond prices when interest rates increase?
Views: 559 BondSavvy
Risk-Free Return or Return-Free Risk: The Hunt for Yield
 
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Negative-yielding securities — unheard of only a few years ago — surpassed $13.4 trillion in as-issued value earlier this year. Hardly anyone batted an eyelash when British gilts — the equivalent of U.S. Treasuries — touched negative territory. As below-zero rates become more widely accepted, investors are wondering, how low can they go? Debt refinancing to take advantage of declining rates is forcing investors to look harder for yield, further exacerbating the risk-return profile of many assets. The uncertainty is especially acute for less-experienced investors, such as corporate treasurers and mutual funds. Where are investors finding opportunities? How do capital-structure dynamics change in a near-zero environment? Is now a time to protect principal or seek higher yields? Has the low-interest-rate environment had an impact on debt-oriented strategies and direct lending in emerging markets? Leading global investors will share their perspectives to identify pockets of opportunity. Moderator Simon Smiles, Chief Investment Officer, Ultrahigh Net Worth, UBS Wealth Management Speakers Marc Barrachin, Head of Product Research and Innovation, S&P Global Market Intelligence Roger Gray, Chief Investment Officer, Universities Superannuation Scheme; CEO, USS Investment Management Ltd. Robert Kricheff, Global Strategist and High-Yield Portfolio Manager, Shenkman Capital Marino Valensise, Head of Multi Asset, Brings
Views: 992 Milken Institute
WACC, Cost of Equity, and Cost of Debt in a DCF
 
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In this WACC and Cost of Equity tutorial, you'll learn how changes to assumptions in a DCF impact variables like the Cost of Equity, Cost of Debt. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" You'll also learn about WACC (Weighted Average Cost of Capital) - and why it is not always so straightforward to answer these questions in interviews. Table of Contents: 2:22 Why Everything is Interrelated 4:22 Summary of Factors That Impact a DCF 6:37 Changes to Debt Percentages in the Capital Structure 11:38 The Risk-Free Rate, Equity Risk Premium, and Beta 12:49 The Tax Rate 14:55 Recap and Summary Why Do WACC, the Cost of Equity, and the Cost of Debt Matter? This is a VERY common interview question: "If a company goes from 10% debt to 30% debt, does its WACC increase or decrease?" "What if the Risk-Free Rate changes? How is everything else impacted?" "What if the company is bigger / smaller?" Plus, you need to use these concepts on the job all the time when valuing companies… these "costs" represent your opportunity cost from investing in a specific company, and you use them to evaluate that company's cash flows and determine how much the company is worth to you. EX: If you can get a 10% yield by investing in other, similar companies in this market, you'd evaluate this company's cash flows against that 10% "discount rate"… …and if this company's debt, tax rate, or overall size changes, you better know how the discount rate also changes! It could easily change the company's value to you, the investor. The Most Important Concept… Everything is interrelated - in other words, more debt will impact BOTH the equity AND the debt investors! Why? Because additional leverage makes the company riskier for everyone involved. The chance of bankruptcy is higher, so the "cost" even to the equity investors increases. AND: Other variables like the Risk-Free Rate will end up impacting everything, including Cost of Equity and Cost of Debt, because both of them are tied to overall interest rates on "safe" government bonds. Tricky: Some changes only make an impact when a company actually has debt (changes to the tax rate), and you can't always predict how the value derived from a DCF will change in response to this. Changes to the DCF Analysis and the Impact on Cost of Equity, Cost of Debt, WACC, and Implied Value: Smaller Company: Cost of Debt, Equity, and WACC are all higher. Bigger Company: Cost of Debt, Equity, and WACC are all lower. * Assuming the same capital structure percentages - if the capital structure is NOT the same, this could go either way. Emerging Market: Cost of Debt, Equity, and WACC are all higher. No Debt to Some Debt: Cost of Equity and Cost of Debt are higher. WACC is lower at first, but eventually higher. Some Debt to No Debt: Cost of Equity and Cost of Debt are lower. It's impossible to say how WACC changes because it depends on where you are in the "U-shaped curve" - if you're above the debt % that minimizes WACC, WACC will decrease. Otherwise, if you're at that minimum or below it, WACC will increase. Higher Risk-Free Rate: Cost of Equity, Debt, and WACC are all higher; they're all lower with a lower Risk-Free Rate. Higher Equity Risk Premium and Higher Beta: Cost of Equity is higher, and so is WACC; Cost of Debt doesn't change in a predictable way in response to these. When these are lower, Cost of Equity and WACC are both lower. Higher Tax Rate: Cost of Equity, Debt, and WACC are all lower; they're higher when the tax rate is lower. ** Assumes the company has debt - if it does not, taxes don't make an impact because there is no tax benefit to interest paid on debt.
What is YIELD SPREAD? What does YIELD SPREAD mean? YIELD SPREAD meaning, definition & explanation
 
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What is YIELD SPREAD? What does YIELD SPREAD mean? YIELD SPREAD meaning - YIELD SPREAD definition - YIELD SPREAD explanation. Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license. In finance, the yield spread or credit spread is the difference between the quoted rates of return on two different investments, usually of different credit quality. It is often an indication of the risk premium for investing in one investment product over another. The phrase is a compound of yield and spread. The "yield spread of X over Y" is generally the annualized percentage return on investment (ROI) of financial instrument X minus the ROI of financial instrument Y. There are several measures of yield spread relative to a benchmark yield curve, including interpolated spread (I-spread), zero-volatility spread (Z-spread), and option-adjusted spread (OAS). Yield spread analysis involves comparing the yield, maturity, liquidity and creditworthiness of two instruments, or of one security relative to a benchmark, and tracking how particular patterns vary over time. When yield spreads widen between bond categories with different credit ratings, all else equal, it implies that the market is factoring more risk of default on the lower-grade bonds. For example, if a risk-free 10-year Treasury note is currently yielding 5% while junk bonds with the same duration are averaging 7%, then the spread between Treasuries and junk bonds is 2%. If that spread widens to 4% (increasing the junk bond yield to 9%), then the market is forecasting a greater risk of default, which implies a slowing economy. A narrowing of yield spreads (between bonds of different risk ratings) implies that the market is factoring in less risk, due to an expanding economy. Yield spread can also be an indicator of profitability for a lender providing a loan to an individual borrower. For consumer loans, particularly home mortgages, an important yield spread is the difference between the interest rate actually paid by the borrower on a particular loan and the (lower) interest rate that the borrower's credit would allow that borrower to pay. For example, if a borrower's credit is good enough to qualify for a loan at 5% interest rate but accepts a loan at 6%, then the extra 1% yield spread (with the same credit risk) translates into additional profit for the lender. As a business strategy, lenders typically offer yield spread premiums to brokers who identify borrowers willing to pay higher yield spreads.
Views: 3460 The Audiopedia