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Yeild to maturity In a work environment employees and employers often discuss 401K plans, investment ideas and other bonds and shares. Many individuals do not have
AND LENDERS GENERAL MOTORS ? WHOLESALE FINANCING OF DEALER INVENTORIES ( Dealer Invoicing) Treated loan as investing and receipt from dealer as operating Telescoping
Submitted by sapphiregrid on April 17, 2008
Category: Business
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In a work environment employees and employers often discuss 401K plans, investment ideas and other bonds and shares. Many individuals do not have a clear idea of investments in the retirement accounts or certificate of deposits maturity process. One employee in our office, raised questions about bonds that were purchased at 10% according to the broker had a yield of maturity of 9%, confusing the individual.
Yield Of Maturity Factors
According to Block and Hirt (2005), the yield to maturity, or discount rate, is the rate of return required by bondholders and three main factors affecting yield of maturity are real rate of return, inflation premium and risk premium. Real rate of return is a return that investors demand after inflation adjustments. Inflation premium is required by investors to compensate the inflation adjustments.
Combining both real rate of return and inflation premium determines the risk-free rate of return. This is the rate that compensates the investor for the current use of his or her funds and for the loss in purchasing power due to inflation but not for taking risks. A risk premium consists of financial risk and business risk to the investor. Business risk relates to the inability of the firm to hold its competitive position and maintain stability and growth in its earnings. Financial risk relates to the inability of the firm to meet its debt obligations as they come due (Block & Hirt, 2005).
Bond and Risk
A bond is a lower risk investment, also called as fixed-income investments. Risk premium can be as low as 2% to 6%. Bonds issued by the federal government are extremely safe. Corporate bonds and municipal bonds, issued by states and cities, can be safe or high-risk (Financialplan.About (2008). The interest rate in bonds is commonly referred to as the coupon rate that matures either quarterly or annually when the bond matures.
Yield of Maturity Process
An employee purchased a bond valued at...
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