Beruflich Dokumente
Kultur Dokumente
Corporate Finance
Dr. A. DeMaskey
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Learning Objectives
Questions to be answered:
What are the major types of financial markets? How is capital transferred between savers and borrowers? What are the major types of international financial markets? How are market interest rates and exchange rates determined? What is the term structure of interest rates? What determines the shape of the yield curve? What other factors influence interest rate levels? How does the level of interest rates affect business decisions?
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International bonds
Foreign bonds: Sold by foreign borrower, but denominated in the currency of the country of issue. Eurobonds: Sold in country other than the one in whose currency it is denominated.
International stocks
ADRs: Certificates representing ownership of foreign stock held in trust.
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10
= Real risk-free rate. T-bond rate if no inflation; 1% to 4%. = Any nominal rate. = Rate on Treasury securities.
k kRF
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LP
MRP
=
=
Liquidity premium.
Maturity risk premium.
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1 yr 10 yr 20 yr
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Inflation premium
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Real risk-free rate
0 1 10
Years to Maturity
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If PEH holds, what does the market expect will be the interest rate on one-year securities, one year from now? Three-year securities, two years from now?
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The primary determinant of the spot/forward rate relationship is relative interest rates.
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f1 1 k h e0 1 k f
Here, kh = periodic interest rate in the home country. kf = periodic interest rate in the foreign country. f1 = one-year forward rate e0 = current spot rate
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or
rates, so borrowing in low-interest countries may appear attractive to multinational firms. However, currencies in low-inflation countries tend to appreciate against those in high-inflation rate countries, so the true interest cost increases over the life of the loan.
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