Question

Please discuss about Bond Valuation, Cost of Capital and Capital markets, what I learn from this chapter?

Answer 1

Bond valuation is a technique for determining the fair value of a bond. Bond valuation includes calculating the present value of a bond's future interest payments and the bond's value upon maturity. Because a bond's par value and interest payments are fixed, an investor uses bond valuation to determine the required rate of return.

Cost of capital is the minimum return required on a capital budgeting project to make the project worth investing. Cost of capital includes the cost of various sources from which the fund is raised for the project. It includes cost of debt , cost of equity and so on. If return earned on project is less than the cost of capital, then the project is not profit and should not be invested in .

Capital market is a market where long term bonds and shares are bought and sold . It helps to transfer the savings of the people to those big players who need the fund to invest and grow. In return, you get paid if the company you invested in performs well. Capital markets are composed of primary and secondary markets. Primary market is the market where company sells its shares to the investors for the first time, where as the secondary market is a market where only investors trade with each other. Capital markets seek to improve transactional efficiencies and also provides liquidity.