Finance Final

The principle Agent Problem

A conflict between the managers and the firms interests.

Valuation Principle

By evaluating cost and benefits using competitive market prices, we can determine whether a decision will make the firm and its investors wealthier.

An arbitrage situation

The practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage.

Opportunity Cost of Capital

The

opportunity cost of capitalis the expected return foregone by investing in a project rather than the next best alternative with similar risk. It acts as a minimum return threshold (benchmark) to ensure capital is used efficiently.

Bonds vocabs:

• Face value (principal)

• Coupon

• Coupon rate

• Maturity date

• Face value (principal): Amount repaid at maturity.

• Coupon: Periodic interest payment.

• Coupon rate: Set by issuer, applied to face value.

• Maturity date: Final repayment date of the bond.

IRR

The IRR is the discount rate that makes the net present value (NPV) of all cash flows equal to zero.

Spot Rate

Die Yield Curve besteht letztlich aus den Spot-Zinssätzen verschiedener Laufzeiten. Jeder Punkt auf der Kurve repräsentiert den Spot-Zins für eine bestimmte Fälligkeit.

• Price = 100

• Price < 100

• Price > 100

• Price = 100 → genau Par (1.000 €)

• Price < 100 → Discount Bond

• Price > 100 → Premium Bond

Credit Spread

The difference between corporate and Treasury yields is called the credit spread.

Discount Rate / Cost of Capital

• The rate used to convert future cash flows into present value.

• REQUIRED RETURN

YTM

PROMISED RETURN