Financial Assets, Markets, and Portfolio Management
Financial Assets and Derivatives
Asset: An asset is any object, tangible or intangible, that holds value for its owner.
Derivative: A derivative is a financial security whose value is derived from an underlying asset or group of assets.
Valuation Concepts
Capitalize: Estimate Future Values. Discount: Estimate Present Values.
Effective Annual Rate
The effective annual rate is the rate expressed on an annual basis, taking into account compounding interest.
Net Present Value (NPV) and Internal Rate of Return
Read MoreUnderstanding Risk and Return in Single Stock Investments
Learning Objectives
After completing this lecture, you will understand the following topics:
- Introduction to Risk
- Risk and Return for Single Stock Investments
Before discussing this important topic, let’s review the areas of finance we have studied so far.
Part I: Introduction and Capital Budgeting
- Financial Markets, Concepts, Definitions
- Review of Accounting
- Interest Rate Theory and Calculations
- Investment Decisions: Net Present Value (NPV) (Valuation), Internal Rate of Return (IRR), Payback
- Capital Budgeting:
Key Financial Ratios and Their Significance
Net Capital Ratios (Expressed in Days)
- Days Receivable = (Accounts Receivable / Sales) x 365
- Days Inventory = (Inventory / Cost of Goods Sold) x 365
- Indicates how many days a product takes to be totally sold.
- Days Payable = (Accounts Payable / Purchases) x 365
- Indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors.
- A high (low) DP indicates that a company is paying its suppliers slower (faster).
- Operating Cycle = Days Inventory + Days Receivable
- Average
Fixed Income Derivatives: Forwards, Futures, and Swaps
Introduction to Fixed Income Derivatives
1. Introduction
A derivative is a security whose value depends on the value of another security. Hedgers include oil producers, farmers, and other commodity producers.
2. Over-the-Counter Markets (OTC)
A decentralized market where dealers are connected through telephone, the internet, and proprietary electronic trading systems (for forwards and swaps).
- Advantages: Terms of contracts are privately negotiated.
- Disadvantages: Counterparty risk.
3. Exchange-Traded Markets
A
Read MoreInvestment Decisions: NPV, IRR, and Discounted Cash Flow
Chapter 8: NPV and Other Investment Criteria
NPV = PV – Initial Investment
A positive NPV means that the project is expected to add value to the firm and, therefore, will increase the wealth of the owner. Accept a project if NPV > 0.
IRR: The project’s expected return. If the cost of capital (required return) equals the IRR (expected return), the NPV = 0. A project’s IRR is the discount rate that makes its NPV = 0. Accept the project if the IRR is greater than r (the project’s cost of capital).
Read MoreStock Returns, Risk, and Portfolio Management
Stock Returns and Risk Premium
1. Calculating Percentage Return on a Stock
What is the percentage return on a stock that was purchased for $50.00, paid a $3.00 dividend after one year, and was then sold for $49.00?
Formula: % Return = (Capital Gain + Dividend) / Initial Share Price
= ($49.00 – $50.00) + $3.00 / $50.00
= 4.00%
2. Calculating Inflation Rate
If a share of stock provided a 14.0% nominal rate of return over the previous year while the real rate of return was 6.0%, then the inflation rate was:
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