Question

In the present value bond valuation model, risk is generally incorporated into the A. cash flows (making some smaller if they are more risky). B. timing of cash flows (assuming more risky cash flows are received early). C. discount rate or required return. D. maturity amount.

Answer 1

Answer:

C. Discount rate or required return.

Explanation:

This is known to be a key concept in equity evaluation and plays a vital role in corperate finance.

It can also be explained as the required rate of return is the minimum return an investor will accept for owning a company's stock, as compensation for a given level of risk associated with holding the stock. Its application is also used in corporate finance to analyze the profitability of potential investment projects.

The formula also uses the risk free rate of return, which is typically the yield on short-term U.S. Treasury securities. The final variable is the market rate of return, which is typically the annual return of the investor. The required rate of return is the minimum return an investor will accept for owning a company's stock, that compensates them for a given level of risk.

Inflation also is been factored in the calculation, which finds the minimum rate of return an investor considers acceptable, taking into account their cost of capital, inflation and the return available on other investments. It is also a subjective minimum rate of return, and a retiree will have a lower risk tolerance and therefore accept a smaller return than an investor who recently graduated college.