Interest Rates and Bond Valuation
INTEREST RATES & BOND VALUATIONWeek 21F0120 Corporate Finance I Academic Department of Finance Universidad del PacíficoM. Gonzalo Chávez, CFAUNIVERSIDAD DEL PACIFICO 1F0120 W2 1OutlineI. The Internal Rate of Return (IRR)II. Interest Rates Quotes and LoansIII. Determinants of Interest RatesIV. Bond Prices and YieldsV. Corporate BondsUNIVERSIDAD DEL PACIFICO 1F0120 W2 2Internal Rate of Return (IRR)•UNIVERSIDAD DEL PACIFICO 1F0120 W2 3Example• Suppose that you face an investment opportunity that requires a $1000 investment today and will have a $2000 payoff in six years,
• r = IRR = 12.25%• Therefore, making this investment is equivalent to earning 12.25% per year on your money for six yearsUNIVERSIDAD DEL PACIFICO 1F0120 W2 4Solving IRR of a Cash Flow Stream[pic 1][pic 2]• Consider a stream of cash flow,• The IRR is calculated by solving the r in the NPV = 0 equation below,• When N > 2, the r may not be solved manually, we need to use a financial calculator or computer softwares (e.g. Excel).UNIVERSIDAD DEL PACIFICO 1F0120 W2 5OutlineI. The Internal Rate of Return (IRR)