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Interest Rates and Bond Valuation

Autor:   •  April 5, 2018  •  Presentation or Speech  •  3,460 Words (14 Pages)  •  831 Views

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INTEREST RATES & BOND VALUATION

Week 2

1F0120 Corporate Finance I Academic Department of Finance Universidad del Pacífico

M. Gonzalo Chávez, CFA

UNIVERSIDAD DEL PACIFICO 1F0120 W2        1


Outline

I.        The Internal Rate of Return (IRR)

II.        Interest Rates Quotes and Loans

III.        Determinants of Interest Rates

IV.        Bond Prices and Yields

V.        Corporate Bonds

UNIVERSIDAD DEL PACIFICO 1F0120 W2        2


Internal Rate of Return (IRR)

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Example

Suppose that you face an investment opportunity that requires a $1000 investment today and will have a $2000 payoff in six years,

r = IRR = 12.25%

Therefore, making this investment is equivalent to earning 12.25% per year on your money for six years

UNIVERSIDAD DEL PACIFICO 1F0120 W2        4


Solving IRR of a Cash Flow Stream[pic 1][pic 2]

Consider a stream of cash flow,

The IRR is calculated by solving the r in the NPV = 0 equation below,

When N > 2, the r may not be solved manually, we need to use a financial calculator or computer softwares (e.g. Excel).

UNIVERSIDAD DEL PACIFICO 1F0120 W2        5


Outline

I.        The Internal Rate of Return (IRR)

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