Determination and Applications of Nominal and Real Rates-of-Return in Financial Analysis

The following sections are included:

• Introduction

• Theoretical Justification of Paying Interest

• Rate-of-Return Measurements and Types of Averages

  • Discrete Rates-of-Return and Continuous Rates-of-Return

  • Types of Averages

  • Power Means

• Theories of the Term Structure and Their Application

• Interest Rate, Price-Level Changes, and Components of Risk Premium

  • Imperfect-Foresight Case

  • Perfect-Foresight Case

• Three Hypotheses about Inflation and the Value of the Firm: A Review

  • The Debtor-Creditor Hypothesis

  • The Tax-Effects Hypothesis

  • Operating-Income Hypothesis

  • The Relationship among the Three Hypotheses

• Summary and Concluding Remarks

• Problem Set

• Appendix 5.A. Compounding and Discounting Processes and Their Applications

• Appendix 5.B. Taylor Series Expansion and Its Applications to Rates-of-Return Determination

• References for Chapter 5