The answer to your question is,
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Answer:
The correct answer is letter "A": The difference between the expected YTM and the YTM of the comparable risk-free bond
.
Explanation:
Risk Premium is a return that exceeds the risk-free rate of return that the investment is expected to yield. The risk premium for an asset takes the form of compensation for investors who tolerate the additional risk of an investment compared to the risk-free asset. In fact, investors expect to receive risk premiums because of the risk they are engaged in with certain investment instruments.
Answer:
Present value is nothing but how much future sum of money worth today. It is one of the important concepts in finance and it is a basis for stock pricing, bond pricing, financial modeling, banking, and insurance, etc. Present value provides us with an estimated amount to be spent today to have an investment worth a certain amount of money at a specific point in the future. Present value is also called a discounted value. It is an indicator for investors that whatever money he will receive today can earn a return in the future. With the help of present value, method investors calculate the present value of a firm’s expected cash flow to decide if a stock is worth to invest today or not.
The formula for calculating PV is shown below
PV = CF/ (1+r)n
Here ‘CF’ is future cash flow, ‘r’ is a discounted rate of return and ‘n’ is the number of periods or year.
Example
Let’s say that you have been promised by someone that he will give you 10,000.00 Rs 5 year from today and interest rate is 8% so no we want to know what the present value of 10,000.00 Rs which you will receive in future so,
PV = 10,000/ (1+0.08)5
PV = 6805.83 (To the nearest Decimal)
So present-day value of Rs 10,000.00 is Rs 6805.83
Explanation: