BUS 320 Study Guide - Final Guide: Premium Bond, Yield Curve, Zero-Coupon Bond

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 320
• Professor: George Blazenko

Document Summary

Forward roe is the rate of return that financial markets expect the firm to earn from business investments for shareholders. Therefore, the appropriate comparison to determine whether a firm creates wealth for shareholders is the forward roe versus the mcr. Higher mcr, the more wealth it generates but higher risk. In this instance, share price is greater if retention is zero, b=0, compared to a positive retention, b>0. Share price is determined by the dividend and its dividend yield. The yield on a bond is your expected rate of return. Therefore, in secondary market trading, two bonds of equal risk must have equal yields. If this were not the case, bond prices would change so that once more the yields on the two bonds, in equilibrium, would be equal to one another. The yield on a bond is composed of an income component, the current yield, and an expected capital gain or loss component.