Time value of money - Research Paper Example

One can settle for less return if he or she is certain about the offered return in a given period of time. At times, when the company is highly reputed and has never defaulted in the past in its history; investor will agree to accept slightly less return for the reason of assured returns in a given time frame. Against this, if the company’s history indicates that it does not pay in time or has defaulted in payments to its debtors then it will force us to ask for the higher return to cover up the associated risk with our capital or delayed payments.

Of course, it is subjective and based on the individual judgment; nevertheless, basic framework in applying the theory about risk and returns remain the same everywhere. Besides, other prevailing parameters such as inflation, interest rates in the market do influence about our decision to settle for appropriate returns. For example, if inflation is ruling at 5 % per annum, any return less than that simply means that our money is depreciating. In the same scenario, if the yearly return received is six percent, it means that net of inflation our real return is only 1 percent.

Above concepts are being applied in answering the questions of this paper. Answer 1) Current inflation rate in U.S is about 2.25 percent and term interest rates for the deposit of one year can be taken as around 1 percent. If the bond belongs to Nvidia Corporation, the company’s financials do not pose any near term threats so far the risk factor is considered. With simple thumb rule, I will not pay more than $1850 for the bond of this company that will fetch me around $2,000 after a year from this company.

(Future value, FinanceProfessor.com) Answer 2. Cash flow (maturity value) available in this case is $2,000 The time period is one year for which it is required to find the present value, which is given as PV = CF * 1/ (1+r)t PV= 1,850 CF= 2,000 t=1, putting these values in the equation, it can be solved for r (discount rate), which will give us applicable discount rate. 1+r= CF/PV 1+r=2000/1850=1.08 or r=0.08 Hence discount rate for this bond is 8 percent. (Present Value, FinanceProfessor.com) Answer 3.

As competitors to Nvidia, two companies selected are Siemens and AMD. Siemens is well established and financially very sound and deals in host of products. I would consider Siemens bonds highly liquid and secured. Based on the track record of Siemens, I would agree to buy bonds from Siemens by paying slightly higher price in comparison to Nvidia. There is absolutely no chance of Siemens’ failing on the redemption payments of bonds issued. All other things remaining the same, risk factor being nil, I would agree to buy these bonds by paying more in comparison to SLP Company Nvidia.

In short, I will agree to slightly less than 8 percent of return while investing with Siemens. However, the same cannot be said for AMD as performance of the company is highly fluctuating in the market quarter after quarter. AMD’s operations are in the limited field and the company certainly carries some risk of failing in its payments for the bond. To cover up my risk of losing the capital or getting the delayed payments, I would certainly look for higher returns than normal. It means that I need to buy the bonds of AMD at