Financial Management-Chapter 7 Solution- Gitman Essay
Western Money Management Inc.
Robert Black and Carol Alvarez are vice presidents of Western Money Management and codirectors of the company’s pension fund management division. A major new client, the California League of Cities, has requested that Western present an investment seminar to the mayors of the represented cities. Black and Alvarez, who will make the presentation, have asked you to help them by answering the following questions. A. Answer: What are a bond’s key features? [Show S7-1 through S7-4 here.] If possible, begin this lecture by showing students an actual bond certificate. We show a real coupon bond with physical coupons. These can no longer …show more content…
Chapter 7: Bonds and Their Valuation
How is the value of any asset whose value is based on expected future cash flows determined?
[Show S7-8 through S7-10 here.] 0 | PV CF1 PV CF2 1 | CF1 2 | CF2 3 | CF3
N | CFN
The value of an asset is merely the present value of its expected future cash flows: Value = PV = =
CF3 CF1 CF2 CFN ... 2 3 1 (1 rd ) (1 rd ) (1 rd ) (1 rd )N
(1 r t 1
CFt d )t
If the cash flows have widely varying risk, or if the yield curve is not horizontal, which signifies that interest rates are expected to change over the life of the cash flows, it would be logical for each period’s cash flow to have a different discount rate. However, it is very difficult to make such adjustments; hence it is