Musings on Markets

JULY 13, 2022

Country Risk: Currency and Cost of Capital As a final part to this post, to see the shifts in country risk that we have seen in 2022, let’s start with an assessment of risk free rates.

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Risk Premium Risk-free Rate Start-ups Equity 102

Valutico

FEBRUARY 27, 2024

More importantly, we’ll dig deeper into how discount rates can influence investment choices and how they’re used to figure out a company’s worth. What is a discount rate? The “discount rate” does two main things. For central banks like the Federal Reserve, it helps control the economy.

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Discounted Cash Flow Risk Premium Risk-free Rate Beta 52

Musings on Markets

JANUARY 30, 2023

Returns in 2022 In my first classes in finance, as a student, I was taught that the US treasury rate was a risk free rate, with the logic being that since the US treasury could always print money, it would not default. I will wager that you would have seen rates go up, with or without the Fed.

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Treasury Start-ups Risk Premium Equity 96

ThomsonReuters

MAY 6, 2021

For instance, assume a bank is performing a discounted cash flow analysis for a mortgage. If a bank expects a borrower to make mortgage payments before the contractual due dates, the prepayments would lead to a lower end value in the discounted cash flow calculation than if the payments were made per the contract terms.

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Discounted Cash Flow Risk Premium Risk-free Rate Intangible Assets 52

Musings on Markets

MARCH 25, 2021

The first is that the Fed Funds rate is currently close to zero, limiting the Fed's capacity to signal with lower rates. for the year are at war with its concurrent promise to keep rates low; after all, adding those numbers up yields a intrinsic risk free rate of 8.7%. for 2021 and inflation of 2.2%

Equity 52

Equity Risk-free Rate Treasury Start-ups 52

Andrew Stolz

MARCH 20, 2020

A firm borrows from banks or bondholders and it has to pay the interest. The formula implies the return an investor expects from a risk-free investment plus the return from the stock in relation to market volatility. The market risk premium is calculated from a market rate of return less a risk-free rate.

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Beta Capital Structure Risk-free Rate Weighted Average Cost of Capital 52

Musings on Markets

JANUARY 21, 2023

That said, when investors buy equities, it would be both irrational and illogical to settle for expected returns that are less than what you can earn on risk free or guaranteed investments, though behavioral finance suggests that both irrationality and illogic are persistent human traits. Stocks: The What Next?

Equity 93

Equity Risk Premium Start-ups Dividends 93

Brian DeChesare

FEBRUARY 28, 2024

For the right person, though, fixed income research can be even better than equity research, whether you’re at a bank, an asset management firm, a hedge fund, or a credit rating agency: Table of Contents: What is Fixed Income Research? Rates: Is the “risk-free rate” truly risk-free ?

Equity 59

Equity Banking Start-ups Finance 59

Brian DeChesare

MAY 3, 2023

But people who aim for investment banking roles are very much into those bells and whistles, so questions about the DDM and other “exotic” methodologies began rolling in. To be fair, in some industries – like commercial banks and insurance within FIG – the DDM is a core valuation methodology.

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Dividends Terminal Value Enterprise Value Equity 64

Valutico

APRIL 17, 2023

The WACC formula derives the current cost of each form of finance, starting with the risk-free rate, the expected return on equity, and the costs associated with debt financing. The required rate of return for equity (Re) is generally calculated using the Capital Asset Pricing Model (CAPM).

Weighted Average Cost of Capital 52

Weighted Average Cost of Capital Discounted Cash Flow Beta Risk-free Rate 52

Valutico

APRIL 17, 2023

The WACC formula derives the current cost of each form of finance, starting with the risk-free rate, the expected return on equity, and the costs associated with debt financing. The required rate of return for equity (Re) is generally calculated using the Capital Asset Pricing Model (CAPM).

Weighted Average Cost of Capital 52

Weighted Average Cost of Capital Discounted Cash Flow Beta Risk-free Rate 52

Valutico

APRIL 12, 2023

The WACC formula derives the current cost of each form of finance, starting with the risk-free rate, the expected return on equity, and the costs associated with debt financing. The required rate of return for equity (Re) is generally calculated using the Capital Asset Pricing Model (CAPM).

Weighted Average Cost of Capital 52

Weighted Average Cost of Capital Discounted Cash Flow Beta Risk-free Rate 52

Musings on Markets

JANUARY 31, 2024

In my last three posts, I looked at the macro (equity risk premiums, default spreads, risk free rates) and micro (company risk measures) that feed into the expected returns we demand on investments, and argued that these expected returns become hurdle rates for businesses, in the form of costs of equity and capital.

Equity 80

Equity Book Value Start-ups Corporate Finance 80

Musings on Markets

MAY 6, 2022

At the other end, in perhaps the most malignant scenario, titled T he Seventies Show , inflation continues to rise, even as the economy goes into recession and risk premiums spike, leading to a further correction of close to 50% in the market.

Risk Premium 102

Risk Premium Treasury Start-ups Equity 102

Musings on Markets

FEBRUARY 11, 2023

The conventional practice, when estimating risk free rates, has been to use the government bond rate in the local currency, if available, as the riskfree rate in that currency, and that practice is wrong when markets perceive default risk in the sovereign and build that into the government bond rate.

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Risk Premium Start-ups Equity Marketability 96

Musings on Markets

MAY 24, 2021

In a sign of how volatile inflation expectations have been over the last year, I looked at the probabilities that the Federal Reserve Bank of St. Louis estimates for inflation rates exceeding 2.5% Embedded in this picture are the multiple pathways that inflation, expected and unexpected, can affect the the values of businesses.

Treasury 55

Treasury Start-ups Risk Premium Price to Book 55

Musings on Markets

JULY 25, 2023

Investors in Saudi Arabia are still exposed to significant risks from political upheaval or unrest, and may prefer a more comprehensive measure of country risk.

Risk Premium 52

Risk Premium Equity Start-ups Risk-free Rate 52

Musings on Markets

JANUARY 28, 2025

It was an interesting year for interest rates in the United States, one in which we got more evidence on the limited power that central banks have to alter the trajectory of market interest rates. We started 2024 with the consensus wisdom that rates would drop during the year, driven by expectations of rate cuts from the Fed.

Banking 69

Banking Treasury Risk Premium Start-ups 69

Musings on Markets

FEBRUARY 6, 2025

I am no expert on exchange rates, but learning to deal with different currencies in valuation is a prerequisite to valuing companies. Thus, if the US treasury bond rate (4.5%) is the riskfree rate in US dollars, and the expected inflation rates in US dollars and Brazilian reals are 2.5%

Risk Premium 67

Risk Premium Start-ups Enterprise Value Equity 67