To create value by investing in 'good' projects.
1) Level of cash flows, 2) Timing of cash flows, 3) Risk of cash flows.
Rules that allow fair comparison based on risk, level, and timing of cash flows.
To invest optimally across various firms.
The costs and benefits of their decisions.
$1 today is not equal to $1 in one year.
Because it can be invested and start earning interest immediately.
$1.10.
Future Value = $1 × (1 + r).
$0.91 (approximately).
Their face value.
Compute the NPV of each project or alternative.
The project with the highest NPV.
A security that provides a constant payment forever starting next year.
They are not highly correlated.
The Law of One Price.
It does not depend on the individual preferences of shareholders.
The one with the highest NPV.
The constant payment received from the perpetuity.
38%.
Regular coupon interest payments.
PV = q / (1 + r)^n
The present value of the perpetuity decreases.
$222,727 today.
Different views on the relative importance of attributes.
The current interest rate.
The interest rate that solves the present value of coupons as an annuity.
The APR quote is less than the actual amount one will pay or earn because it does not include the effect of compounding.
By dividing the constant payment by (1 + r).
56%.
An annuity with payments of C from time t = 1 to t = N.
The sum of the stock’s dividend yield and the capital gain rate.
As the difference between a perpetuity starting at t = 1 and a perpetuity starting at t = N + 1.
Using three zero-coupon bonds.
The effects of the passage of time on bond prices when the yield remains constant.
They are independent of each other.
$1,153.
It is calculated using the discount rate r per period.
The idea that money available today is worth more than the same amount in the future due to its potential earning capacity.
Present value (PV).
The total value of a portfolio is equal to the sum of the values of its individual assets.
The capital gain the investor will earn on the stock divided by the current stock price.
Maximize NPV first.
When a firm uses excess cash to buy back its own stock.
$10,000.
The process of earning interest on both the initial principal and the accumulated interest from previous periods.
It rises.
In an efficient market, identical goods must sell for the same price when expressed in a common currency.
An investor who holds the stock for one year.
A bond issued by a corporation, such as Apple or Roche.
Borrow or lend to shift cash flows through time.
Yes, it can be computed.
Share repurchases.
It allows investments to grow exponentially over time, significantly increasing the total return.
An arbitrage opportunity will appear.
-$1,000.
It tumbles, reflecting the amount of the coupon payment.
Your purchasing power increases, as you can buy more than the car with your investment.
It allows investors to assess the value of combined investments based on individual asset values.
By dividing the expected annual dividend of the stock by its current price.
It rises smoothly.
'q' represents the amount to be received in the future.
Future value.
'n' represents the number of years until the amount is received.
The rate paid by the Swiss Confederation on its debt.
The interest earned increases with the number of compounding periods.
Issued its first green bond.
$1.05.
$99,048.
The yield to maturity is lower than the coupon rate due to the bond being sold at a premium.
The difference between the project’s present value and the cost of implementing the project.
CEOs might meet rating targets but fail to improve the firm's overall ESG performance.
The funds raised with the bond.
The yield solves YTM = FV / P - 1.
You have 1 + 2r + r².
Investments where a cash flow series can be produced more cheaply within the firm than by investing in financial assets.
Saudi Arabia's Public Investment Fund selling green bonds.
The YTM can be calculated using the current price, face value, and the number of periods to maturity.
100.
Equity increases from 200 to 210, an increase of 10.
0.91%.
2.01%.
It typically reduces the NPV.
The coupon is adjusted depending on whether the company meets predetermined and externally verified sustainability objectives.
$105,000.
Default-free zero-coupon bonds.
The growth rate g must be less than the discount rate r.
The yield is calculated using the present value of future cash flows from the bond.
Financing that takes into account environmental, social, and governance (ESG) factors.
A bond that does not make coupon payments and only pays the face value at maturity.
The total payout model.
Price Security = PV(All the cash flows paid by the security).
It should accept all projects that have a positive net present value (NPV).
The rates quoted by financial institutions and used for discounting cash flows.
They assess a company's performance on environmental, social, and governance criteria, influencing investment decisions.
The PV can be calculated using the appropriate discount rate from the provided rates.
A market without arbitrage opportunities.
$90.70.
50%.
It typically reduces the NPV of an investment.
To raise money from debt investors.
To calculate the present value of a stream of cash flows.
The relationship between the term of an investment and the interest rates offered by banks.
$1.1025.
Your money nearly doubles.
It is key to ensuring the credibility of the green bond's environmental commitment.
Because it's easier to monitor monetary transactions than timely environmental outcomes.
Corporations or governments to raise money from investors.
The value is calculated using the formula C / (r - g), where C is the first payment, r is the discount rate, and g is the growth rate.
The interest rate at which money can be borrowed or lent without risk.
It explains the reason for the existence of large companies.
A specific discounting formula for time-varying interest rates.
The risk of default, meaning the bond is not repaid in full.
$60,000.
They extend to multiple periods.
Asset C is equivalent to a portfolio of assets A and B, so PC = PA + PB.
1.000%.
EAR accounts for compounding, while APR indicates the amount of simple interest earned in one year, ignoring compounding.
They are set in the market and adjusted until the supply of lending matches the demand for borrowing at each loan term.
Their present values exceed their costs.
It reflects the actual interest earned each compounding period.
The rate of return that an investor earns if they hold the bond until maturity.
You earn interest on interest, increasing the total return.
20%.
Greenwashing, where firms overstate or mislead about their environmental performance.
By providing a framework for accountability and transparency in sustainability claims.
It increases almost 7-fold.
It is detrimental when rates are low.
The NPV becomes negative.
Undertake positive net present value projects.
By subtracting costs from benefits.
She wants money now and suggests investing in small cars for quick profit.
5%.
FV = q(1 + r)^n.
A bond that pays periodic interest payments (coupons) to the bondholder.
The longer the time period, the greater the effect of compounding on the investment's growth.
Your purchasing power decreases, as you can no longer buy the car with your investment.
Banks.
A higher interest rate increases the amount of interest earned, enhancing the compounding effect.
The potential return from the investment in government bonds.
The principle of value additivity.
The rate of return earned if the bond is bought at its current price and held to maturity.
As a bond approaches its maturity date, its price tends to converge to its face value.
This requires calculation based on her savings plan and interest rate.
It focuses on 'E' rather than the broader ESG criteria.
Desilution and confusion when people realize the labels do not measure what they want them to measure.
5% every 6 months.
They have a real impact and are not merely a tool of greenwashing.
$17.2 billion.
By dividing the total equity value by the number of outstanding shares.
$2.5 million per year for four years.
The notional amount used to compute the interest payments.
4.44%.
The rates quoted by financial institutions and used for discounting cash flows.
It matters for many sectors of the economy.
A firm's ESG performance.
The practice of buying and selling equivalent goods in different markets to take advantage of a price difference.
MSCI, Sustainalytics, InRate, among others.
The face value of the bond on the maturity date.
They may trade at a discount, at par, or at a premium.
65 years old.
It ensures that markets are efficient and helps prevent arbitrage opportunities.
The price of the coupon bond decreases.
$104,000.
Inflation can decrease purchasing power if prices increase faster than nominal interest rates.
If equivalent investment opportunities trade simultaneously in different markets, they must trade for the same price in both markets.
They are not designed to measure a company’s impact on climate change.
It shows the relationship between real interest rate, nominal interest rate, and inflation.
The value of the firm and the value of equity increase.
60.
By the coupon rate of the bond set by the issuer.
They improve environmental performance, including environmental ratings and CO2 emissions.
Cash flows.
Effective Annual Rate.
The yield to maturity is higher than the coupon rate due to the bond being sold at a discount.
It makes it difficult to evaluate the ESG performance of companies, funds, and portfolios.
It is calculated using the formula C * [(1 - (1 + g)^n / (1 + r)^n) / (r - g)], where C is the first payment, r is the discount rate, g is the growth rate, and n is the number of periods.
They always trade at a discount.
10%.
CHF 320,000,000.
Markets are less likely to price firms’ ESG performance ex post.
$100,000 today.
It will immediately increase the stock price, even if payoffs are far in the future.
An investor earns a return from both receiving the coupons and from the face value that exceeds the price paid for the bond.
50.
March 27, 2023.
PV = c1/(1+r) + c2/(1+r)^2 + ... + cN/(1+r)^N.
If the coupon rate is higher than the market rate, the bond price will be above par; if lower, it will be below par.
A loan where the interest rate is tied to the borrower's sustainability performance.
The opportunity for arbitrage will force the price of the security to rise until it equals $952.38.
$1,000 × (1.10)⁷⁵ = $1,271,895.72.
They increase financial performance metrics such as CAR and ROA.
A credible commitment toward the environment.
A financial security in which the issuer promises to make interest and principal payments to the holder.
Maturity date, face value, and coupon.
It wants money in the long term and suggests building solar-powered cars.
'r' represents the interest rate.
They influence very short-term interest rates through the rate at which banks can borrow overnight.
Because the expected cash flow is lower due to the probability of non-payment.
All of the firm’s equity rather than a single share.
It measures how well a company manages ESG risks to its own bottom line.
The yield of bonds with credit risk will be higher than that of otherwise identical default-free bonds.
The same simplifications obtained by assuming constant growth.
Investing with the intention to generate positive social and environmental impact alongside a financial return.
The decision to reject the investment remains the same.
Growth of purchasing power = Growth of money - Growth of prices.
30%.
It typically reduces the demand for loans.
EUR 500,000,000.
A graphical representation of the term structure of interest rates.
It is often interpreted as a negative forecast for economic growth.
260.
$9.5 million.
The final repayment date.
The total amount of interest that will be earned at the end of one year.
It decreases their incentives to improve ESG performance due to mixed signals from rating agencies.
The trend of the bond price just after each coupon is paid.
Bond prices inversely move with interest rates; when rates rise, bond prices fall and vice versa.
It helps in saving for the future by understanding the value of future cash flows today.
$110.25.
$860 million.
Green Bond Funds.
Based on their ability to manage risks compared to peers in their industry.
The yield to maturity will exceed the coupon rate.
10.
$952.38.
They indicate a firm's commitment to sustainability.
7.5%.
100.
Annual Percentage Rate.
$79.26 per share.
0.245 (approximately 0).
The yield to maturity equals the coupon rate of 10% since the bond is sold at par.
It grows to e^(r) as k approaches infinity.
By raising the interest rate factor (1 + r) to the appropriate power.
They aim to curb inflation by slowing down the economy (demand).
-$952.
The rate of growth of your purchasing power, after adjusting for inflation.
By selling her share in the market.
Invest in firms perceived to be 'green' and divest from those perceived to be 'brown'.
Green bonds, sustainability-linked loans, and social impact bonds.
0.550%.
60.
$1,000 × (1.10)²⁰ = $6,727.50.
10%.
200.
$50.
160.
Bonds whose financial characteristics can vary based on whether the issuer achieves predefined sustainability/ESG objectives.
The terms of the bond, including amounts and dates of all payments.
Coupon.
Reject the investment.
Debt securities issued to raise funds for projects with positive environmental impacts.
If two identical assets are priced differently, arbitrageurs will buy the cheaper one and sell the more expensive one until prices converge.
It occurs when it is possible to make a profit without taking any risk or making any investment.
lim (k→∞) (1 + r/k)^k = e^r.
Because they are priced lower than the face value when interest rates are positive.
It refers to the interest earned on previously earned interest, increasing the total amount over time.
30 years.
The PV can be calculated using the appropriate discount rate from the provided table.
No, it does not directly imply that the issuing company/entity is green.
Given the bond price, we can compute the yield to maturity.
$1,000 × (1.10)⁷ = $1,948.72.
Does this strategy make sense? Can it work? How does it compare to imposing a carbon tax?
1.500%.
