Corporation finance

Part III. Financial Planning and Short-Term Financial Management………....11
1. Financial Analysis and Planning………………………………………………..11
2. Short-Term Financial Planning…………………………………………………13
3. Cash Management………………………………………………...………........14
4. Credit Management………………………………………………………….…..15
Reference……………………………………………………………………………….16
Part I. Debt Financing
1.1. Valuing Debt
Real and Nominal Interest Rates: Most debt securities promise a fixed nominal interest rate. Fisher postulated that real rates are not affected by changes in inflation. According to Fisher, the relationship between real interest rates and nominal or money rates of interest rate is given by:
1 + rmoney = (1 + rreal)(1 + i)
Therefore, real rate = money rate - inflation rate (approximately)
Spot Rates, Term Structure, and Yield to Maturity: The spot rate is the rate of interest obtainable on a bond at the present, or spot, time period. The series of spot rates of different maturities results in a term structure of interest rates; typically, the term structure is upward sloping, with long-term rates higher than short-term rates. The term structure is a series of spot rates r1, r2, r3,….. . Safe cash flows are valued as:
PV = ,
where rI is the spot rate for the "ith" year.
This is how each bond is valued in the market. However, we use the yield to maturity as a summary measure. The yield to maturity is an internal rate of return and unambiguous and easy to calculate. The problems with yield to maturity include:
• Assumes that yield to maturity does not change,
• Assumes a constant reinvestment rate of return, and
• Yield to maturity does not determine price; it is vice versa.
Duration and Volatility: The prices of long-term bonds vary more than short-term bonds. Duration and volatility are two useful measures, which enable us to formalize this relationship. Duration is the average time for the total cash flow to be realized from an asset, such as a bond. It is actually a weighted average, where the date to each cash...

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