Investors requirements

The cost of capital is the rate of return investors require to induce them to invest in a company with a given level of risk. The weighted average cost of capital is the blended cost of the fro s debt and equity capital (285,409). 

The minimum interest rate that an investor should require is the yield available in the marketplace on a default-free cash flow. For bonds whose cash flows are denominated in euros, yields on European government securities serve as benchmarks for default-free interest rates. In some European countries, the swap curve serves as a benchmark for pricing spread product (e.g., corporate bonds). For now, we can think of the minimum interest rate that investors require as the yield on a comparable maturity benchmark security. 

This relationship between the credit spread, the hazard rate, and recovery rate is intuitively appealing. The credit spread is perceived to be the extra yield (or return) the investor requires for credit risk assumed. For example ... 

When optimizing the return of the portfolio, risk has to be taken into account. Within a shortfall risk approach the portfolio is optimal that falls short of a user specified minimum return (e.g., r, in = 0%) with a given shortfall probability p (e.g., 10%). A very risk averse investor requires a higher minimum return and a lower shortfall probability than a less risk averse one. Exhibit 27.2 displays this graphically in the risk/ return diagram. 

The discount rate used to derive the present value of a bond s cash flows is the interest rate that the bondholders require as compensation for the risk of lending their money to the issuer. The yield investors require on a bond depends on a number of political and economic factors, including what other bonds in the same class are yielding. Yield is always quoted as an annualized interest rate. This means that the rate used to discount the cash flows of a bond paying semiannual coupons is exactly half the bond s yield. 

Up to now, the discussion has centered essentially on plain vanilla securities, bonds with a fixed-coupon and maturity date. However, much of the fixed-income markets revolves around more complex instruments, arranged to meet specific investor requirements. These include ... 

What if, instead of the observed yields to maturity, investors required the theoretical spot yields from figure 16.3 FIGURE 16.8 shows that, in this case, the total proceeds from the sale of the zero-coupon Treasuries would be approximately 100, representing no profit and thus rendering the stripping process uneconomical. These two scenarios demonstrate that profit opportunities exist where strip yields deviate from theoretical ones. 

Finally, FIGURE 16.11 shows the cash flow analysis for the coupon strip maturing on February 15, 2014, and trading at a yield of 4.089 percent, for a price of 67.01 per 100 nominal. This illustrates an anomaly noted earlier although the law of one price states that all strips maturing on the same date should cost the same—after all, why would investors require a different yield for a payment of interest than for one of principal —principal strips in fact trade at lower yields than coupon strips, because they are more liquid and so more sought after. 

Projecting the electronic protection systems it should consider the investor requirements and the character of the protected object (e.g. location of the protected objects in terrain, distances between buildings, etc). It is worth to accomplish the reliability analysis of the designed system, especially in the case when these obj ects relate to the special destination (e.g. the protection o f air port, railway stations). I f it does not fulfill the assumptions, it is necessary to execute the reconfiguration of the system by using of elements with better... 

The key assumption behind the YTM calculation has already been discussed—that the redemption yield rm remains stable for the entire life of the bond, so that all coupons are reinvested at this same rate. The assumption is unrealistic, however. It can be predicted with virtual certainty that the interest rates paid by instruments with maturities equal to those of the bond at each coupon date will differ from rm at some point, at least, during the life of the bond. In practice, however, investors require a rate of return that is equivalent to the price that they are paying for a bond, and the redemption yield is as good a measurement as any. 

Credit enhancement refers to the group of measures that can be instituted as part of the securitization process for ABS and MBS issues so that the credit rating of the issued notes meets investor requirements. The lower the quality of the assets being securitized, the greater the need for credit enhancement. This is usually by one of the following methods ... 

---