Inflation and Real Rates of Return Essay Example | Topics and Well Written Essays - 1500 words

Inflation and Real Rates of Return - Essay ExampleReal sake evaluate can be positive as well as negative. A positive real interest deem indicates that the purchasing power of the individual is increasing while a negative interest site shows that the purchasing power of the individual is diminish if the individual invests at the nominal rate. From the calculations above, it can be still that at the current level of inflation, if a person invests in 1-year Certificate of Deposits, he will mop up up with less purchasing power. It can be analysed in such a way that a higher inflation rate than the nominal interest rate way of life that the purchasing power is decreasing at a faster rate than the rate of return of the investment. 2. Duration (Bonds) a. Frederick Macaulay developed a method to measure the interest rate risk of a bond and called it Macaulay Duration. He felt that duration is a better measure of the bonds worth than its time to maturity because duration considers bot h the repayment of capital at maturity and the size and timing of coupon payments before maturity (Macaulay Duration). Macaulay Duration is the weight average term to maturity of the cash flows from a bond. The weight of each cash flow is ascertain by dividing the present economic value of the cash flow by the price (Macaulay Duration Definition). Duration measures a bonds price sensitivity to interest rate changes. ... Calculating V- I/Y= 9% V- = $92.406 Calculating V+ I/Y= 11% V+ = $87.781 3. Price-Earnings Ratio a. False. The PE ratio is equal to the grocery store price of the share divided by the earnings per share (EPS). If we are using the dividend discount amaze to estimate the share price, a higher beta would lead to a higher required rate of return. This would decrease the share price and as a bequeath the PE ratio will decrease. b. True. The PE ratio tells us how much an investor is willing to pay for $1 of a beau mondes earnings. If the net income of a company is go od then the investors will be willing to pay more for a dollar earned. The hard roe is equal to the net income divided by the average shareholders candor. A higher net income means a higher ROE. c. False. If we are using the dividend discount model to estimate the share price, higher dividends will result in a higher share price. Higher share price will increase the PE ratio. When the plowback rate is higher the dividends will be lower. 4. Book Value a. The market to parole value signifies how many multiplication a companys stock is operating per share compare to the companys book value per share. The organizations book value reflect historic costs, hence this ratio is meaning(a) in indicating the managements success in adding value for its shareholders in case of the market value being higher than the book value. A high price to book value ratio means that shareholders expect the management of the company to create more value with the given level of assets. b. Common shareholder s equity = (20,000 x 20) + 5,000,000 + 70,000 Common shareholders equity = $5,470,000 Book value per share = Common shareholders equity / Number of greenness shares outstanding Book value per share = 5,470,000 /