Principles of Finance Essay Example | Topics and Well Written Essays - 5000 words

Principles of Finance - Essay Example The effective annual rate computations below show that issue 7.375s19 has generated an effective annual rate of twenty one and 852/100 percent. The issue that generated the lowest effective annual rate is issue 7.375s20 which generated a very low seven and 37.5/100 effective annual rate. Thee lowest annual percentage yield, this is similar to Effective Annual Rate, comes from issue 7.375s20 with the annual percentage yield of only seven and 37.5/100. he yield to call resulted to the following computations. There are many mathematical business tools that finance uses to help us in our decision making processes. Some of the tools used are the Annual Percentage, the Period Rate and the Effective Annual Rate. The many computations below will show how they are made useful. The annual percentage rate is computed by multiplying the periodic rate by the number of periods. For example 10% quarterly is really equal to 40%. The annual rate is stated as the yearly cost of a mortgage that includes interest, Mortgage insurance, and the origination fees which is shown in percentages. Based on the above computation, issue 7.375s20 has annual percentage rate of 7.375 percent. The issue 7.375s19 was computed to generate annual percentage rate of 14.75 percent. The next issue, 8.250s28, when computed had generated the annual percentage rate of 8.25 percent. The next issue, 6.730s17 when also computed generated annual percentage Periodic rate rate of 13.46 percent. The last issue, 6.850s32 generated an annual percentage rate of 13.70 percent. PERIODIC RATE: 7.375s20 7.375 % x 1 = 7.375 % 7.375s19 7.375 % x 2 = 14.75 % 8.250s28 8.25 % x 1 = 8.25 % 6.730s17 6.73 % x 2 = 13.46 % 6.850s32 6.85 % x 2 = 13.70 % Periodic rate is the effective interest rate. To explain further, when the periodic rate on a credit card is 2.5% per month on the outstanding balance, the annual periodic rate is 2.5% x twelve months which is equal to thirty percent. When computing

Modern finance assignment Example | Topics and Well Written Essays - 1250 words

Modern finance - Assignment Example The formula is structured this way in order to make its analysis easier and more standardized. c. The investor in this case, by applying the model, understands the non feasibility of exercising the call option, since the price of the asset is lower than the strike price of 110. Question 2 a. Re = Ra + D/E(Ra-Rd) Firm A: 14% + 0.4(14%-9%) = 0.16 or 16% Firm B: 14% + 0.5(14%-9%) = 0.165 or 16.5% The return to equity represents the return required by shareholders. In this scenario, with all other factors constant, as the Debt to Equity ratios only differ, the results show that for Firm B, the shareholders require a 0.5% higher return than Firm A shareholders, due to the higher leverage. b. given the data, we also know that Risk = variance = w^2(a)*sigma(a)^2 + w(b)^2*sigma(b)^2 + 2w(a)w(b)*p*sigma(a)*sigma(b) i. 0.52*0.052 + 0.52*0.062 + (2*0.5*0.5*1*0.05*0.06) = 0.00303 Std dev = 5.5% ii. 0.52*0.052 + 0.52*0.062 + (2*0.5*0.5*-1*0.05*0.06) = 0.00003 Std dev = 0.5% iii. 0.52*0.052 + 0.52 *0.062 + (2*0.5*0.5*0.5*0.05*0.06) = 0.00228 Std dev = 4.77% c. ... Risk averse investors will usually never invest in risky assets and will play it safe. This means they will remain on or close to the Y axis of the graph below, taking on minimal or no risk and earning a low return. Investors with higher risk preferences will balance their portfolios with risky and risk free assets to achieve an optimal balanced portfolio which offers a return in line with risks. Their goal will be to reach the efficient frontier as shown below in the graph. Adding a risk free asset to a risk averse investors portfolio will not affect his return much. However, doing the same with a risk taking investor may reduce the return earned by the portfolio. As money used in the risk free asset could otherwise be utilized in higher risky assets to obtain a higher return. References Botkin, S. C. (2007). Lower your taxes-big time! : wealth-building, tax reduction secrets from an IRS insider. New York, McGraw-Hill. Chriss, N. (1997). Black-Scholes and beyond option pricing model s. New York, McGraw-Hill. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=51958. JA?GER, C., & BO?Ckhaus, C. F. (2011). The Black & Scholes formula and resulting advancements derivation and interpretation with special focus on the validity of the underlying assumptions. Aachen, Shaker. Siegel, J. G., Shim, J. K., Hartman, S., & Siegel, J. G. (1998). Schaum's quick guide to business formulas 201 decision-making tools for business, finance, and accounting students. New York, N.Y., McGraw-Hill.