Musings on Markets

MAY 6, 2022

Note that in all three cases, it is not the Fed that is driving rates, but what is happening to inflation. As the inflation bogeyman returns, the worries of what may need to happen to the economy to bring inflation back under control have also mounted.

Risk Premium 92

Risk Premium Treasury Start-ups Equity 92

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%. Riskfree rate will rise.

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.

Beta 52

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

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.

Dividends 64

Dividends Terminal Value Enterprise Value Equity 64

Musings on Markets

JANUARY 21, 2023

The premium that investors demand over and above the risk free rate is the equity risk premium , and practitioners in finance have wrestled with how best to estimate that number, since it is not easily observable (unlike the expected return on a bond which manifests as a current market interest rate).

Equity 70

Equity Risk Premium Start-ups Dividends 70

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.

Discounted Cash Flow 52

Discounted Cash Flow Risk-free Rate Risk Premium Intangible Assets 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 79

Equity Book Value Start-ups Corporate Finance 79

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% Consequently, as inflation increases, equity risk premiums will tend to increase.

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. For three decades, I have wrestled with measuring this additional risk exposure and converting that measurement into an equity risk premium, but it remains a work in progress.

Risk Premium 52

Risk Premium Equity Start-ups Risk-free Rate 52