FIN20014 Lecture Notes - Lecture 4: Interest Rate Risk
Document Summary
Fin20014 financial management lecture-4 valuation of shares and debentures/bonds. Government and companies borrow money from the public on a long term basis by issuing or selling notes, bonds / debentures. Features: face (or par) value, maturity, coupon rate. Preference share: holders enjoy dividend (normally at a fixed rate) priority over ordinary shares; sometimes without voting rights. Financial assets are valued under certainty by discounting the known future cash flows at the market interest rate and adding the present values of the future cash flows. The internal rate of return on a bond. The financial press reports bond yields which are yields to maturity. In australia, coupon payments are generally made semi-annually. Market convention is that quoted yields and coupon rates are on an annual basis, where the annual rates are twice the half-year rates. Impact of change in market rates on bond value. There is an inverse relationship between interest rates and bond value.
