The Credit Quality of a Corporate Bond Issuer
To illustrate how to evaluate the credit quality of a corporation, we will look at CVS, a US-based healthcare company. You will be in the shoes of a banker that needs to assess the creditworthiness of CVS. Using the financial…
Factors That Influence the Level and Volatility of Yield Spreads
As we saw previously, the yield on a government bond (the benchmark) is: $$\text{Goverment bond yield = Real risk-free interest rate + Expected inflation rate + Maturity premium}$$ To this benchmark yield, we need to add the yield spread, the…
Credit of High Yield, Sovereign, and Non-sovereign Government Debt
Special considerations are important when evaluating the creditworthiness of debt issuers in 3 market segments: high-yield corporate bonds, sovereign bonds, and non-sovereign government bonds. High-yield (non-investment-grade or “junk”) corporate bonds are those rated below Baa3/BBB- by the major rating agencies….
NPV Vs IRR
The net present value (NPV) and the internal rate of return (IRR) are techniques that can both be used by financial institutions or individuals when making major investment decisions. Each method has its own strengths and weaknesses. However, the net…
Net Present Value of an Investment Project
The Net present value (NPV) of a project refers to the present value of all cash inflows minus the present value of all cash outflows, evaluated at a given discount rate. The difference between the two represents the income generated…
Effective Annual Rate of Interest (EAR)
The effective annual rate of interest (EAR) refers to the rate of return earned by an investor in a year, taking the effects of compounding into account. Remember, compounding is the process by which invested funds grow exponentially as a…
Present and Future Values
Future Values The Future Value (FV) of a Single Sum of Cash Flow The Future Value (FV) of a single sum of money is the future amount of money invested today at a given interest rate (r) for a specified…
