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Essay / Research Paper Abstract
This 3 page paper looks at the way an investor may assess the value of a corporate bond with reference to the risk associated with the firm’s risk profile and their own investment risk attitude. The bibliography cites 3 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TEassbond.doc
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Unformatted sample text from the term paper:
money. It is well known that the same amount of money tomorrow will not have the same value as it has today. At the most basic level inflation will erode
the value of money over time. If the investor is to make an investment they will be doing this to make a gain and not a loss. Therefore, the
starting point to asses the future value of $1,000 is to discount this amount by the expected level of inflation. The current level of inflation projected for the next year
may not be accurate, but if we assume this to be 3% we will need to discount the $1,000 by 3% to give a value today. The formula to calculate
this is relativity simple, it is Rt/(1+i)t. Here t is the time of the cash flow, I is the discount rate to be used, in this case the 3% inflation
and Rt is the is the net cash flow at a particular point in time, here it is the $1,000 in the years time. This gives us the following
Future value Discount factor Present value 1,000 0.970874 970.87 If the investor simply want to maintain the value of their investment and believes that the projection of a 3% interest
rate is accurate then they may be prepared to pay $970.87 for the $1,000 bond. However, there are usually better investment option that simply maintaining the value of money.
The aim if investment for more than a very short period, (a few weeks to a few months) is to increase the value, meaning real return over and above inflation
(Howells and Bain, 2007). To assess the price an investor may pay it may be argued as more appropriate to assess the potential opportunity cost; this is the amount that
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