Reference no: EM131928505
Interest rates are at the base of Corporate Finance; Government bonds, weighted average cost of capital, required rate of return, internal rate of return depend on the actual level of interest rate benchmark controlled by the Federal Reserve in United States, similar structures execute monetary policies in several countries around the world; but US interest rates are referred as the free-risk interest rates.
When the economy is overheating and inflationary pressures emerge, the FED increases the benchmark to cooldown the economy, this process resets the whole system up, for instance cost of capital increases, decreasing NPV of projects under evaluation in capital budgeting, discount rates (as cost of capital) for valuating purposes increase, bringing down prices for stocks in the FCF forecasting model, US treasury bond yield increases, sending up all nominal yields; in brief, interest rates are crucial in Corporate Finance.
And now we are at the end of an era, the rally in interest rates that it has happened during the last three decades, from 9.5% in the mid-eighties to 1.5% one year ago, is on the verge of breaking up.
New political tendencies around the world will lead to a receding in globalization trough changes in regulation, protectionism and re-leverage of armament between the most influential countries.
This will bring inefficiencies back in the economies that will open a path of inflation and therefore interest rates will go higher to new territory.
In the time frame of six months to one year and a half, the US treasury 10 years' bond will hit 3%, to open the door for a higher correction. This macroeconomic variable: interest rates will be in the center of every new evaluation of project in capital budgeting, in computing cost of capital, in the level on risk-free interest rate, in the spreads of corporate bonds, in assessing betas for companies, as they drift higher and higher in the next 5 to 10 years.
Question
How the concepts and/or skills provided could be used in the real world ?
|
What is the guaranteed fair price of a 3-month t-bill
: What is the guaranteed fair price of a 3-month T-Bill to be delivered at 6 months from now, assume continuous compounding?
|
|
Use libor discounting to find the value of the swap
: The average of the bid and offer fixed rates currently being swapped for three-month LIBOR is 12% per annum for all maturities.
|
|
Prepare a statement of retained earnings for nicoles spa
: Nicole Mackisey is thinking of forming her own spa. Prepare a statement of retained earnings for Nicole's Getaway Spa for the year ended December 31, 2013.
|
|
Is this strategy profitable to borrow usd
: The one-year forward rate is USDJPY 108. Assume an arbitrageur tries to use CIA by borrowing USD and investing proceeds in JPY, is this strategy profitable?
|
|
How the concepts and skills provided could be used
: Interest rates are at the base of Corporate Finance; Government bonds, weighted average cost of capital, required rate of return.
|
|
Complete a depreciation schedule for alternative methods
: Nicole's Getaway Spa (NGS) purchased a hydrotherapy tub system to add to the wellness. Complete a depreciation schedule for each of the alternative methods.
|
|
What was the sales price per share of original stock issue
: What was the sales price per share of the original stock issue? How many shares of stock did the corporation acquire in Entry 2?
|
|
Write the current fair value of the european call
: The stock's volatility (sigma) is A4 per annum, and the risk-free interest rate is A5 percent per annum, continuously compounded.
|
|
Percent of risk-weighted assets
: What is the bank's Tier 1 capital in percent of risk-weighted assets, to the nearest 0.01%? (E.g., if your answer is 5.753%, record it as 5.75.)
|