Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Referring to the three fundamental principles and three precepts of finance below, integrate a principle, a precept, or both in your response. In addition, integrate
Referring to the three fundamental principles and three precepts of finance below, integrate a principle, a precept, or both in your response. In addition, integrate 1-2 external credible references to support your thoughts. At least 250 words, APA format.
- FP1: The value of any asset is equal to the present value of the cash flows the asset is expected to produce over its economic life.
- FP2: There is a direct relationship between risk and return; as perceived risk increases, required return will also increase (and vice versa), holding other things constant.
- FP3: There is an inverse relationship between price and yield; if an asset's price increases, its return will decrease (and vice versa), holding other things constant.
- PR1: The present value of a cash flow (or an asset) is inversely related to its discount rate; increasing the discount rate decreases the present value (and vice versa), holding other things constant.
- PR2: The timing of the cash flows of an asset is important; sooner is better (later cash flows are more heavily discounted, reducing their present value).
- PR3: The present value of a cash flow (or an asset) is inversely related to its perceived risk; the higher the risk, the higher the discount rate, and therefore the lower the present value.
1. Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started