Professional Documents
Culture Documents
Forms of Businesses
1-1
Proprietorship
Partnership
1-2
Advantages
Disadvantages
Easy to set up
Subject to few regulations
No corporate income taxes
Corporation
Advantages
Disadvantages
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Higher tax rate (typically)
Double taxation: one at corporate level, one on
1-4
LECTURE 1B : CHAPTER 7
Interest Rates
1-5
Expected inflation
1-6
Production opportunities:
Affects Demand for funds: those with higher rate of return from
investment are more prepared to pay higher cost of borrowing.
Risk
Expected inflation
1-8
r*
IP
= Inflation Premium
= Liquidity Premium
1-9
IP = Inflation Premium.
It is the average expected inflation rate over the life of the
security.
rRF = r* + IP + MRP, is the nominal or quoted risk-free rate (this
overrides textbook definition which excludes the MRP).
Further, the default for risk-free rate is nominal risk-free rate and not
real risk-free rate, so risk-free rate means the nominal risk-free rate.
rRF = represents the interest rate earned on Treasury securities.
I.O.U. document issued by Government when it borrows.
Can be bought/sold. It is default-free and very liquid
1-10
DRP
LP
L-T Treasury
MRP
DRP
LP
r = r* + IP + MRP + DRP + LP
1-12
1-13
Interest
14%
March 1980
12%
10%
8%
February 2000
6%
4%
October
2008
2%
0%
0
10
20
30
Years to Maturity
1-14
IPN =
N INFL
N
t=1
N
1-15
IP1 = 5% / 1 = 5.00%
IP10= [5% + 6% + 8%(8)] / 10 = 7.50%
MRPt 0.1% ( t - 1 )
1-17
Equation is linear.
Maturity Risk Premium is increasing as the time
to maturity increases, as it should be.
1-18
10
Inflation premium
10
Years to
20 Maturity
1-20
Corporate bond
yield spread
1-21
1-22
1-24
SRL.
RL
= 0.1019 = 10.19%
The 4-year interest rate starting at Yr-3 and ending at Yr-7 is expected
to be 10.19%
1-25
Future
Rate
Long
Rate
1-26
Yield
1 year
6.0%
2 years
6.2%
3 years
6.4%
4 years
6.45%
5 years
6.5%
x% p.a.
1
6.2% p.a.
(1.062)2
= (1.060) (1+x)
1.12784/1.060 = (1+x)
6.4004% = x
1-28
x% p.a.
2
6.5% p.a.
1-29
MRP > 0
1-31
Chapter 2
2-32
What is a Market?
2-33
2-36
Review
Forms of Business:
Proprietorship
Partnership
Corporation
1-37
Review
1-38