Characteristics of Risk.The characteristics of risk can be summarized as below:Risk measures the changes in the product price. The more debt in the business, the riskier the investment. The larger the margin of safety, the lower the risk. The more variable the return, the riskier the investment.Characteristics of Risk ReturnInvestment implies … [Read more...] about Characteristics of Risk
Finance
Problems of Valuation
Problems of Valuation.When a business is transferred or its assets are sold, it is necessary for the parties involved in the transaction to agree upon the price to be paid. The decision on the price to be paid is often difficult to arrive at. The balance sheet surplus of assets over liabilities is the generally accepted guide to the price to be paid for the business as a … [Read more...] about Problems of Valuation
Term Structure of Interest Rates Theories
Term Structure of Interest Rates Theories: The term structure of interest rate refers to the relationship between time to maturity and yields for a particular category of bonds at a particular point in time. Particular theories are developed to explain the nature of bond yields over time.Term Structure of Interest Rates TheoriesThe following Term Structure of Interest Rates … [Read more...] about Term Structure of Interest Rates Theories
Valuation of Bond or Debenture
Valuation of Bond or Debenture.It is relatively easy to determine the intrinsic value of a bond or a debenture. If there is no risk of default, there is no difficulty in estimating the cash flows associated with a bond. The expected cash flows consist of the annual interest payments plus the principal amount to be recovered at maturity or sooner. The appropriate … [Read more...] about Valuation of Bond or Debenture
Price-Earning Ratio Approach
Price-Earning Ratio Approach.The ratio is the ratio of price per share to earning per share is commonly known as the price-earning ratio. Much of the real world discussion of stock market valuation concentrates on the firm’s price-earning multiple. Earning a multiplier approach states that the price of the stock is equal to the product of its earnings and a multiplier. It … [Read more...] about Price-Earning Ratio Approach
Distinguish Between Business risk and Financial risk
Distinguish Between Business risk and financial risk.Business risk is the risk that a business faces in not being able to generate adequate income to cover operating expenses.Financial risk is the risk that a business will not be able to generate enough cash flow and income to pay their debts and meet their other financial obligations.Distinguish Between Business risk … [Read more...] about Distinguish Between Business risk and Financial risk
Relationship between the stock price and its determinants
Relationship between the stock price and its determinantsThe relationship between the stock price and its determinants are summarized below:The notion of the determinants Impact on stock priceInterest rates rise (fall). Stock prices fall (rise).An increase (decrease) in expected corporate earnings. Stock prices tend to increase (decrease).A change in government … [Read more...] about Relationship between the stock price and its determinants
Discuss on Bond Duration and Bond Volatility with Example
Discuss on Bond Duration and Bond Volatility with Example.A bond will face interest rate risk if the holding period differs from duration. For any bond, there is a holding period at which the effect of reinvestment risk and price risk balances each other. The lose of reinvestment of interest can be compensated by a capital gain on the sale of the bond and vice versa. For this … [Read more...] about Discuss on Bond Duration and Bond Volatility with Example
What are the risks of investing in a bond?
What are the risks of investing in a bond?As compared to other financial assets or securities fixed income securities are considered to be less risky. Though they are less risky, they are not entirely risk-free securities. Therefore, the investment in bonds is a function of various types and sources of risk. The actual return from a bond may differ from the expected return … [Read more...] about What are the risks of investing in a bond?
Derivatives Markets – The Development and Creative Application of Financial Techniques
Derivatives Markets - Financial engineering can be defined as the development and creative application of financial techniques for solving financial problems, exploiting investment opportunities, and to add value.Derivatives MarketsFinancial transactions and investment activities particularly insecurities as well as involve uncertainty. Fluctuations in the financial assets … [Read more...] about Derivatives Markets – The Development and Creative Application of Financial Techniques