Fundamentals of Financial Management (Concise 6th Edition)

160 Part 2 Fundamental Concepts in Financial Management e. What’s the difference between an ordinary annuity and an annuity due? ...

F I N A N C I A L A S S E T S 6 Interest Rates 7 Bonds and Their Valuation 8 Risk and Rates of Return 9 Stocks and Their Valuati ...

L o w I n t e r e s t R a t e s E n c o u r a g e I n v e s t me n t a n d S t i mu l a t e C o n s u me r S p e n d i n g Inter ...

Companies raise capital in two main forms: debt and equity. In a free economy, capi- tal, like other items, is allocated through ...

164 Part 3 Financial Assets to Mr. Crusoe would constitute savings, these savings would be invested in the ! shnet, and the extr ...

Chapter 6 Interest Rates 165 6-2 INTEREST RATE LEVELS Borrowers bid for the available supply of debt capital using interest rate ...

166 Part 3 Financial Assets environment, money is transferred from Market H to Market L and the risk pre- mium rises from 2% to ...

Chapter 6 Interest Rates 167 These tendencies do not hold exactly, as demonstrated by the period after 1984. Oil prices fell dra ...

168 Part 3 Financial Assets labor unions’ ability to push through cost-increasing wage hikes. As these realiza- tions set in, in ...

Chapter 6 Interest Rates 169 Because rRF " r* # IP, we can rewrite Equation 6-1 as follows: Nominal, or quoted, rate! r! rRF " D ...

170 Part 3 Financial Assets 6-3b The Nominal, or Quoted, Risk-Free Rate of Interest, rRF! r* " IP The nominal, or quoted, risk-f ...

Chapter 6 Interest Rates 171 reported! gures might show an annual in" ation rate of 3% over the past 12 months, but that is for ...

172 Part 3 Financial Assets expected in" ation rate for the next year, but the in" ation rate built into a 30-year bond is the a ...

Chapter 6 Interest Rates 173 Since the yield curve is normally upward-sloping, short-term debt is normally less expensive than l ...

174 Part 3 Financial Assets which is higher the greater the years to maturity, is included in the required interest rate. The ef ...

Chapter 6 Interest Rates 175 6-4 THE TERM STRUCTURE OF INTEREST RATES The term structure of interest rates describes the relatio ...

176 Part 3 Financial Assets As the! gure shows, the yield curve changes in position and in slope over time. In March 1980, all r ...

Chapter 6 Interest Rates 177 Therefore, the best forecast for the future value of r* is its current value. However, the in" atio ...

178 Part 3 Financial Assets weaker economic conditions generally lead to declining in" ation, which, in turn, results in lower l ...

Chapter 6 Interest Rates 179 Interest Rate (%) 12 10 8 6 4 2 0 10 20 30 Years to Maturity BBB-Rated Bond AA-Rated Bond Treasury ...