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What is the difference between discount rate and coupon rate?
For this answer we have to know the six categories of premioum:a. Inflation premium(more risk): high inflation means tha investors will require a higher return in order to invest at a certain project.b. Maturity premium: the longer the duration of a project, the higher the return that investors will require.c. Liquidity premium: the excess return that investors will require in order to invest their capital in a less desirable project on a secondary market.d. Exchange rate risk premium: the excess return that investors will require in order to invest their capital in a foreign financial assets that has volatile exchange rate.e. default risk premium: .... in order to invest in a more (??) project to default companyf. Real rate of interests
What is the premium that reflects the risk associated with changes in interest rates for l long-term security?
Maturity Risk Premium (MPR)
What is the advantage of liquidity premium theory?
The liquidity premium theory offers the advantage of explaining why investors demand higher yields on longer-term securities compared to shorter-term ones. This premium compensates investors for the added risks associated with lower liquidity in long-term assets, such as the potential difficulty in selling them quickly or at a fair price. By incorporating liquidity concerns into interest rate models, the theory provides a more comprehensive understanding of the term structure of interest rates, capturing the nuances of investor behavior and market conditions.
If the inflation premium for a bond goes up the price of the bond?
The price of the bond decreases; the inflation premium would increase the market interest rate, which in bond valuation is located in the denominator, and the coupon payment rate is located in the numerator. When calculating the NPV of future coupon payments, as the denominator or market interest rate + inflation premium increases, the Net Present Value of future coupon payments decreases and the overall value of the bond decreases as well. The price of the bond decreases; the inflation premium would increase the market interest rate, which in bond valuation is located in the denominator, and the coupon payment rate is located in the numerator. When calculating the NPV of future coupon payments, as the denominator or market interest rate + inflation premium increases, the Net Present Value of future coupon payments decreases and the overall value of the bond decreases as well.
If the market risk premium were to increase everything else beign equal the value of common stock would do what?
Value of the common stock will go down.As market becomes riskier market participants adjust expected risk premium and start to demand higher returns, consequently they begin to sell stocks as they do not satisfy their newly adjusted expected risk premium. As a result stock price goes down.
What is risk premium?
Risk premium is the compensation investors expect to earn in return for taking risks.
Why would the cost of equity increase if the risk-free rate increases?
I start my disclaimer that i might be wrong..But i must give it a Try...Now According to the cost of equity formula it is =Rf+B(Risk premium),,,,risk premium is nothing but the difference b/w Rm-Rf.....so the equation becomes Rf+B(Rm-Rf)..here Rm is Expected returns from the stock........When the Rf increases Ist part of the equation increases the cost of equity whereas if we see the second part of the equation decreases the cost of Equity(If Rm is kept constant)......but As Rf increases the Rm also increases and hence the The Second part of the equation Also increases so the effect of Increases Cost of equity....I hope i made some sense....
What is expectation premium?
Expectation premium refers to the additional return that investors expect to receive for taking on a certain level of risk. It is essentially the compensation investors demand for holding an asset that may be subject to various uncertainties, such as market fluctuations or economic conditions. The expectation premium is a key consideration for investors when assessing the potential returns from an investment.
Where does security premium come in cash flow statement?
Security premium is part of cash flow from financing activities
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
The positively sloped linear function that represents the relationship between expected returns and security betas is known as the Security Market Line (SML). In the Capital Asset Pricing Model (CAPM), the SML illustrates how the expected return of a security increases with its systematic risk (beta). The slope of the SML is determined by the market risk premium, which reflects the additional return investors expect for taking on higher risk.
What is security premium in management accounting?
Security premium in management accounting is the difference between the nominal value and the selling price of shares.
What are the factors that determine the required rate of return for a security?
The required rate of return for a security is influenced by several key factors, including the risk-free rate, which is typically represented by government bond yields, and the security's risk premium, which compensates investors for taking on additional risk. This risk premium can be affected by the security's volatility, market conditions, and the company's specific financial health and performance. Additionally, macroeconomic factors, such as inflation and interest rates, also play a crucial role in determining the overall required rate of return.
What is the difference between discount rate and coupon rate?
For this answer we have to know the six categories of premioum:a. Inflation premium(more risk): high inflation means tha investors will require a higher return in order to invest at a certain project.b. Maturity premium: the longer the duration of a project, the higher the return that investors will require.c. Liquidity premium: the excess return that investors will require in order to invest their capital in a less desirable project on a secondary market.d. Exchange rate risk premium: the excess return that investors will require in order to invest their capital in a foreign financial assets that has volatile exchange rate.e. default risk premium: .... in order to invest in a more (??) project to default companyf. Real rate of interests
If forfeiture share is reissued at premium then why security premium is credited?
in case the shares have been issued at a premium and the amount of premium has been received then at the time of forfeiture of such share
Why should the risky stocks be sold at premium?
Actually the riskier the stock the larger the discount rather than a premium. The riskier a stock is the more likely it is that you could loose everything you have invested. It all comes down to the risk reward analysis. Investors must determine if the potential loss of a substantial amount of their investment is worth the reward if things work out in their favor. This determination will be based on each individuals risk tolerance. The riskier the stock becomes the less people will be willing to invest and it begins to effect the stock price resulting in that particular security trading at a discount to the market. Stocks with large potential can sell at a premium in the hopes that the potential will be realized. But, this is entirely different than a premium given based on the amount of risk. As percieved risk becomes greater stock prices decline.
Which long term care insurance policy would be less likely to require premium increases?
Policies with level-premium structures are less likely to require premium increases compared to those with age-rated or inflation-adjusted premiums. Level-premium policies have a consistent premium amount that remains unchanged over the life of the policy, providing greater certainty in terms of premium costs.
Can your employer pay for my medicare premium?
can my employer pay my medicare premium instead of taking it out of social security
