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Articles by Probir Banerjee
Page 37 of 45
How to calculate Expected Rate of Return(ERR)
An investment’s “expected return” is the total money one can expect to lose or gain on an investment with a foreseeable rate of return. Basically, it lets one know whether the investment would be profitable providing enough money or it will be a loss, costing the investors’ money. By extension, it also tells one what kind of return you can expect when from a portfolio with a particular mix of investments.Understanding the Limits of Expected ReturnThe expected rate of return is more of a closer guess than a firm prediction. Regardless of whether you calculate the expected return of an ...
Read MoreWhat are Ordinary Shares?
Ordinary shares, also known as common shares, are used to raise capital for businesses. They are equity stocks that provide voting rights to the shareholders. Usually, dividends on ordinary shares are distributed according to the discretion of the management of the company that issues these shares. The dividends are distributed according to availability of profits. Common shares represent the ownership of shareholders in the company.ExplanationCommon shares provide the ownership rights to shareholders as per their number of shares the shareholders have. These shareholders have the right to voting and they are offered some privileges as an owner of a company. ...
Read MoreWhat are the pitfalls of the Price Earnings Ratio (P/E Ratio)?
Not Cash EarningsThe biggest and, by far, the most prominent disadvantage of the P/E ratio is that the earnings it shows are the accounting earnings. These earnings are defined by the accounting standards of specific standards for a particular country. The earnings are not the cash earnings of the firm. In fact, many companies in the stock exchange report profits but gain no cash actually.Not Easy to Estimate the Value of a CompanyAnother problem with the P/E assumption is that the earnings stay the same for a considerable time in the future. So, if a company is trading at 10 ...
Read MoreWhat is Standard Deviation of Return?
Standard Deviation (SD) is a technique of statistics that represents the risk or volatility in investment. It gives a fair picture of the fund's return. It tells how much data can deviate from the historical mean return of the investment.The higher the Standard Deviation, the higher will be the ups and downs in the returns. For example, for a fund with a 15 percent average rate of return and an SD of 5 percent, the return will deviate in the range from 10-20 percent.Note − In SD, the ends of volatility are determined by adding and subtracting the average return ...
Read MoreWhat is meant by Default Risk and Default Premium?
What is Default Risk?Both corporate and governments issue bonds for the investors, but there is a clear difference between them. Government bonds are free from the chances of default. That is, it is believed that government bonds will never fail to pay the interest rates and the principal as and when required.On the other hand, corporate bonds are not free from the chances of default as the investment made by the corporate are more risky assets. Corporate bonds therefore have the chances of a default if they go bankrupt or face other issues.The risk of corporate bonds going bankrupt and ...
Read MoreHow are redeemable and non-redeemable preference shares valued?
It's known to us that redeemable shares can be bought back by the issuing company on a later date but irredeemable shares cannot be bought back by the issuer before the date of maturity. However, for internal operation and regulatory reasons, shares need to be valued. There are many methods to calculate the value of a share. Let's check some of them.There are three classical valuation approaches to find the value of shares −Income ApproachMarket ApproachCost ApproachIncome ApproachThe discounted cash flow method is an appropriate and suitable method to determine the value of a non-redeemable share. The two inputs required ...
Read MoreWhat are pure discount bonds?
Unlike most other bonds, pure discount bonds do not carry an explicit interest rate. Instead, they offer a lump sum depending on the current face value of the bond on a future date. The difference between the purchase value and face value gives the YTM or return to the investor in such bonds.Pure discount bonds have −Purchase value − The present price of the bond.Maturity value − That is equal to a face value in the future.Maturity period − The time taken for maturity.Discount bonds have a lower price than the par value or a bond that is being traded ...
Read MoreWhat is meant by the Duration of a Bond?
The duration of a bond is its weighted average of times of cash flow. The calculation of duration provides importance to cash flows and their timing. The weight is calculated for the present value of cash flow to the bond value.Therefore, three types of calculations are involved in computing the duration of a bond −Calculating PV for each cash flow.Divide each cash flow by the aggregate of all cash flows for getting weights.Multiply years by each cash flow and summate for the duration.Note − Two bonds with equal face value but different coupon rates and cash flow patterns will have different ...
Read MoreWhat are Yield to Maturity, Yield to Call, and Current Yield?
Yield to MaturityA bond's yield to maturity is the bond's overall rate of return, considering both incomes from interests and any capital loss or gain. YTM is the internal rate of return of the bond. It is assumed in the case of YTM that an investor will buy the bond and hold it until it gains maturity value, and all interests and coupon payments have been made in a pre-assigned manner.Approximated YTMThe YTM considered above gives an approximate value. To get the real YTM, investors should use the trial and error process to find the best match of price with ...
Read MoreWhat is a bond (debenture) and what are its features?
A bond is a long-term debt instrument, such as security usually redeemable after a certain period of maturity. The bond is issued by a party, such as the government to raise money. All bonds are not the same in nature. Some bonds may not be redeemable all the time and could be redeemed after maturity as well.Bonds issued by the government are free from risk and the government will always pay the interest which is low in terms of public and private bonds. Public bonds are also quite dependable but they are not free from default. Private-sector bonds offer the ...
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