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Essay / Research Paper Abstract
This 4-page paper discusses cost of capital, credit default swaps, and the impact of the financial meltdown on both. Bibliography lists 4 sources.
Page Count:
4 pages (~225 words per page)
File: D0_MTbacoscap.rtf
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Unformatted sample text from the term paper:
banking structure. What well do in this paper is describe the impact of the financial crisis on the cost of capital of banks. Well also include a brief description about
credit default swaps and how it has impacted the banks and cost of capital. But before we go into an explanation, it would be helpful to define both credit default
swaps and cost of capital. Credit default swaps, or CDS as theyre often known, guarantees the buyer credit protection, whereas the seller
guarantees the credit worthiness of the swap (Credit Default Swaps 2008). With a CDS, the risk of default is transferred from the holder of a fixed income security (such as
a bond or a mortgage) to the swaps seller (and subsequent buyer) (Credit Default Swaps 2008). In the example of the bond holder, the buyer of the bonds credit swap
is entitled to the bonds par value by the swaps seller, in the event the bond defaults in coupon payments (Credit Default Swaps 2008).
In the meantime, cost of capital is the return necessary to make a project worthwhile for a bank to invest in - and it typically includes cost of
debt and equity (Investopedia 2009). The cost of capital determines how a company can raise money - whether it be through stock, taking on debt, or mixing the two (Investopedia
2009). The cost of capital is also known as the rate of return a company receives if it invested in a different vehicle with similar risk (Investopedia 2009).
How is the cost of capital impacted in a financial meltdown like the current one the world is experiencing? Well, when liquidity is stymied
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