Sesi 1 Manajemen Keuangan 2 KKG REVISI

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    Menejemen Keuangan II/M 1

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    MINGGU 1MANAJEMEN KEUANGAN 2MANAJEMEN KEUANGAN 2

    Pokok Bahasan:

    Interest rate or require return

    !ujuan Instruksiona" Khusus:Agar mahasis#a a$at mengerti an memahami

    Interest rate or require return%e&erensi:

    1' Gitman( )a#ren*e J'( +2,11-(Principles ofManagerial Finance,1,the'( Aison.es"e0 ortuent' +ha$ 3-

    2' Bear"e0 4 M0ers( +2,,5-(Principles of CorporateFinance,6the' M*ra# 7i"" In*' +ha$ 245-

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    Interest Rates & Required Returns

    The interest rate or required return represents

    the price of money.

    Interest rates act as a regulating device that

    controls the flow of money between suppliers

    and demanders of funds.

    The Board of Governors of the Federal Reserve

    Systemregularly asses economic conditions and,

    when necessary, initiate actions to change

    interest rates to control inflation and economic

    growth.

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    Interest Rates & Required Returns

    Interest rates represent the compensation that a

    demander of funds must pay a supplier.

    When funds are lent, the cost of borrowing is theinterest rate.

    When funds are raised by issuing stocks or

    bonds, the cost the company must pay is called

    the required return, which reflects the suppliersexpected level of return.

    Interest Rate undamentals

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    Interest Rates & Required Returns

    The real interest rate is the rate that creates an

    equilibrium between the supply of savings and the

    demand for investment funds in a perfect world.

    In this contet, a perfect world is one in which there is

    no inflation, where suppliers and demanders have no

    liquidity preference, and where all outcomes are

    certain.

    The supply-demand relationship that determines thereal rate is shown in the graph on the following slide.

    !he Real Rate of Interest

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    Interest Rates & Required Returns

    Ignoring risk factors, the cost of funds is closely

    tied to inflationary expectations.

    !he risk"free rate of interest, R, which is typicallymeasured by a #"month $.%. !reasury bill &!"bill'

    compensates investors only for the real rate of

    return andfor the expected rate of inflation.

    !he relationship between the annual rate ofinflation and the return on !"bills is shown on the

    following slide.

    Inflation and the (ost of )oney

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    Interest Rates & Required Returns

    The nominal rate of interestis the actual rate of interest

    charged by the supplier of funds and paid by the

    demander. The nominal rate differs from the real rate of interest,

    !" as a result of two factors#

    Inflationary epectations reflected in an inflation

    premium $I%, and

    Issuer and issue characteristics such as default ris!s

    and contractual provisions as reflected in a ris!

    premium $R%.

    'ominal or (ctual Rate of Interest $Return

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    Interest Rates & Required Returns

    )sing this notation, the nominal rate of interest for

    security *, !*is given in equation +.*, and is further

    defined in equations +. and +.-.

    'ominal or (ctual Rate of Interest $Return

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    Interest Rates & Required Returns

    The term structure of interest rates relates the interest

    rate to the time to maturity for securities with a commondefault ris! profile.

    Typically, treasury securities are used to construct yield

    curvessince all have ero ris! of default.

    /owever, yield curves could also be constructed with((( or BBB corporate bonds or other types of similar

    ris! securities.

    !erm %tructure of Interest Rates

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    Theories of Term 0tructure

    !his theory suggest that the shape of the yield curve

    reflects investors expectations about the future

    direction of inflation and interest rates.

    !herefore, an upward"sloping yield curve reflects

    expectations of higher future inflation and interest

    rates. In general, the very strong relationship between

    inflation and interest rates supports this theory.

    *xpectations !heory

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    Theories of Term 0tructure

    This theory contends that long term interest rates tend

    to be higher than short term rates for two reasons#

    + long1term securities are perceived to be ris!ier than

    short1term securities

    + borrowers are generally willing to pay more for

    long1term funds because they can loc! in at a rate

    for a longer period of time and avoid the need to rollover the debt.

    iquidity -reference !heory

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    Theories of Term 0tructure

    !his theory suggests that the market for debt at

    any point in time is segmented on the basis of

    maturity.

    s a result, the shape of the yield curve will

    depend on the supply and demand for a givenmaturity at a given point in time.

    )arket %egmentation !heory

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    2orporate Bonds

    ( bond is a long1term debt instrument that pays the

    bondholder a specified amount of periodic interest rate

    over a specified period of time.

    The bond3s principal is the amount borrowed by the

    company and the amount owed to the bond holder on

    the maturity date.

    The bond3s maturity date is the time at which a bond

    becomes due and the principal must be repaid.

    The bond3s coupon rateis the specified interest rate $or 4amount that must be periodically paid.

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    2orporate Bonds

    !he bond/s current yield is the annual interest&income' divided by the current price of the security.

    !he bond/s yield-to-maturity is the yield &expressed

    as a compound rate of return' earned on a bond from

    the time it is acquired until the maturity date of the

    bond.

    yield curve graphically shows the relationship

    between the time to maturity and yields for debt in agiven risk class.

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    2orporate Bonds

    In general, the longer the bonds maturity, the higher the

    interest rate $or cost to the firm.

    In addition, the larger the sizeof the offering, the lower

    will be the cost $in 5 terms of the bond.

    (lso, the greater the risk of the issuing firm, the higher

    the cost of the issue.

    6inally, the cost of money in the capital mar!et is thebasis form determining a bond3s coupon interest rate.

    (ost of 0onds to the Issuer

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    2orporate Bonds

    The conversion feature of convertible bonds allows

    bondholders to echange their bonds for a specified

    number of shares of common stoc!.

    Bondholders will eercise this option only when the

    mar!et price of the stoc! is greater than the conversion

    price.

    ( call feature, which is included in most corporate

    issues, gives the issuer the opportunity to repurchase the

    bond prior to maturity at the call price.

    1eneral eatures

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    2orporate Bonds

    In general, the call premiumis equal to one year of

    coupon interest and compensates the holder for

    having it called prior to maturity.

    urthermore, issuers will exercise the call feature

    when interest rates fall and the issuer can

    refund the issue at a lower cost.

    Issuers typically must pay a higher rate to investorsfor the call feature compared to issues without the

    feature.

    1eneral eatures

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    2orporate Bonds

    Bonds also are occasionally issued with stock purchase

    warrantsattached to them to ma!e them more attractive

    to investors.

    7arrants give the bondholder the right to purchase acertain number of shares of the same firm3s common

    stoc! at a specified price during a specified period of

    time.

    Including warrants typically allows the firm to raise debtcapital at a lower cost than would be possible in their

    absence.

    1eneral eatures

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    2orporate Bonds

    2ompanies and governments borrow internationally

    by issuing bonds in the Eurobond mar!et and the

    foreign bond mar!et.

    (Eurobondis issued by an international borrower and

    sold to investors in countries with currencies other

    than the currency in which the bond is

    denominated.

    In contrast, aforeign bondis issued in a host country3s

    financial mar!et, in the host country3s currency,

    by a foreign borrower.

    International 0ond Issues

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    8aluation 6undamentals

    The market! valueof any investment asset is simply the

    present valueof epected cash flows.

    The interest rate that these cash flows are discounted at

    is called the asset3s required return. The required return is a function of the epected rate of

    inflationand the perceived riskof the asset.

    /igher perceived ris! results in a higher required

    return and lower asset mar!et values.

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    Basic 8aluation 9odel

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    Bonds with 9aturity :ates

    6or eample, find the price of a *;5 coupon bond with

    three years to maturity if mar!et interest rates are

    currently *;5.

    B; < 4*;; = 4*;; = $4*;; = 4*,;;;

    $*=.*;* $*=.*; $*=.*;-

    (nnual 2ompounding

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    2oupon >ffects on %rice 8olatility

    The amount of bond price volatility depends on threebasic factors#

    + length of time to maturity

    + ris!

    + amount of coupon interest paid by the bond

    6irst, we already have seen that the longer the term to

    maturity, the greater is a bond3s volatility

    0econd, the ris!ier a bond, the more variable therequired return will be, resulting in greater price

    volatility.

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    6inally, the amount of coupon interest also impacts a

    bond3s price volatility.

    0pecifically, the lower the coupon, the greater will be the

    bond3s volatility, because it will be longer before theinvestor receives a significant portion of the cash flow

    from his or her investment.

    2oupon >ffects on %rice 8olatility

    The amount of bond price volatility depends on three

    basic factors#

    + length of time to maturity

    + ris!

    + amount of coupon interest paid by the bond

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    2urrent ?ield

    !he (urrent 2ield measures the annual return to aninvestor based on the current price.

    (urrent 3 nnual (oupon Interest

    2ield (urrent )arket -rice

    6or eample, a *;5 coupon bond which is currently selling at

    4*,*@; would have a current yield of#

    2urrent < 4*;; < A.5

    ?ield 4*,*@;

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    Theyield to maturitymeasures the compound annual

    return to an investor and considers all bond cash flows.

    It is essentially the bond3s IRR based on the current

    price.

    'otice that this is the same equation we saw earlier when we

    solved for price. The only difference then is that we are

    solving for a different un!nown. In this case, we know themar!et price but are solving for return.

    %8 < I* = I = C = $In= 9n

    $*=!* $*=! $*=!n

    ?ield to 9aturity $?T9

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    'ote that the yield to maturity will only be equal if the

    bond is selling for its face value $4*,;;;.

    (nd that rate will be the same as the bond3s coupon rate.

    6or premium bonds, the current yield D ?T9. 6or discount bonds, the current yield E ?T9.

    ?ield to 9aturity $?T9

    The yield to maturity measures the compound annual

    return to an investor and considers all bond cash flows.

    It is essentially the bond3s IRR based on the current

    price.