Copyright © 2005 Pearson Education Canada Inc.7-1 Interest Real Versus Nominal Interest Rates  Nominal rate of interest The market rate of interest expressed.

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Presentation transcript:

Copyright © 2005 Pearson Education Canada Inc.7-1 Interest Real Versus Nominal Interest Rates  Nominal rate of interest The market rate of interest expressed in today’s dollars.  Real rate of interest The nominal rate of interest minus the anticipated rate of inflation.

Copyright © 2005 Pearson Education Canada Inc.7-2 Interest The Allocative Role of Interest  Interest is a price that allocates loanable funds (credit) to consumers and to businesses.

Copyright © 2005 Pearson Education Canada Inc.7-3 Interest Interest Rates and Present Value  Present value The value of a future amount expressed in today’s dollars. The most that someone would pay today to receive a certain sum at some point in the future.

Copyright © 2005 Pearson Education Canada Inc.7-4 Interest

Copyright © 2005 Pearson Education Canada Inc.7-5 Interest Discounting  The method by which the present value of a future sum or a future stream of sums is obtained. Rate of Discount  The rate of interest used to discount future sums back to present value.

Copyright © 2005 Pearson Education Canada Inc.7-6 Interest Present value for more distant periods

Copyright © 2005 Pearson Education Canada Inc.7-7 Corporate Financing Methods Share  A legal claim to a share of a corporation’s future profits. Common stock oIncorporates certain voting rights regarding major policy decisions of the corporation Preferred stock oOwners are accorded preferential treatment in the payment of dividends

Copyright © 2005 Pearson Education Canada Inc.7-8 Corporate Financing Methods Bond  A legal claim against a firm, usually entitling the owner of the bond to receive a fixed annual coupon payment, plus a lump-sum payment at the bond’s maturity date.  Issued in return for funds lent to the firm.

Copyright © 2005 Pearson Education Canada Inc.7-9 Corporate Financing Methods Reinvestment  Profits used to purchase new capital equipment. Securities  Stocks and Bonds.

Copyright © 2005 Pearson Education Canada Inc.7-10 Corporate Financing Methods Toronto Stock Exchange (TSX)  Over 1700 stocks traded  About 100 brokerage firms pay up to $60,000 per seat to trade on the TSX

Copyright © 2005 Pearson Education Canada Inc.7-11 Corporate Financing Methods HiLoStockSymDivHiLoCloseChgVolYieldP/E (100s)ratio Molson Monrc Dv Moneta Por j Montrusco MOL.B MON ME MTA

Copyright © 2005 Pearson Education Canada Inc.7-12 Corporate Financing Methods The Theory of Efficient Markets  Two Approaches to predicting securities prices: Random Walk Theory oThe theory that there are no predictable trends in security prices that can be used to “get rich quick.” Inside Information oInformation that is not available to the general public about what is happening in a corporation.

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